Opinion Piece
High Petrol Prices - how it might unfold over the next few years or so

summary   details of fading hydrocarbons   price spikes   recession in the USA    recession overview   response to recession
recession to depressio

2008  - A crucial year to clarify what has happened.
World conventional crude oil
As at 2009, world conventional crude oil (excluding condensate) peaked in july 2008 at 74.83 million barrels a day.

World crude oil plus condensate production has peaked and is declining

It is clear that crude oil+ (plus 'lease' condensates - liquids from a gas stream harvested at the oil/natural gas well-head by the well operator) peaked in 2005 at just over 74 million barrels a day.

Current world crude oil plus condensate production

Crude oil plus 'lease' condensate production going into 2008 is at about 73.3 million barrels a day.

Current world 'Oil equivalent' liquids harvested as a by-product from natural gas wells
The 'light' liquids processed out of the natural gas stream by the gas refining industry amounts to an additional almost 8 million barrels of 'oil equivalent' a day at the beginning of 2008.

The amount of natural gas produced globally is increasing at the moment, resulting in an increase in the supply of natural gas liquids. The 'lease condensate' portion of these liquids is conventionally added to the crude oil inventory. This will tend to 'hold up' the global headline global 'oil' production figure.

Natural Gas Plant Liquids production is predicted to rise steadily over 2008, with an increase of over a million barrels a day by the years end.

Total world conventional oil and 'oil equivalent' production
Production of total 'conventional oil and 'oil equivalent' liquids is now sitting at about 81 million barrels a day. This is similar to production in 2006, when the figure was about 81.3
barrels of 'oil equivalent' a day.

Total world conventional oil, conventional liquids, unconventional oil and 'other' unconventional liquids
The figures are for crude oil, lease condensate, natural gas plant liquids, refinery gain, ethanol, tar sands, shales, biofuel and anything else that could be turned into a liquid fuel.
The final figure for all liquid fuel for 2006 was a bit over 85 million barrels a day.
The final figure for 2007 are 85.41 million barrels a day (as at feb 2009)
The current figure for 2008 is 86.59 million barrels a day (IEA.)

New Fields and expansions in existing fields
Contra last years predictions, Saudi Arabia's
'traditional' fields carefully managed (and especially the Ghawar megafield) will probably continue to yield around 8 million barrels of oil a day. Saudi's Khursaniyah expansion, bringing in another 500,000 barrels a day is due soon. The Khurais megaproject aims to bring in over a million barrels a day by 2009.  Shaybah  is due to produce an additional 250,000 barrels a day  in 2008. Even so, the Saudi stable of highly productive fields is depleting at a significant rate. The annual decline rate of North Ghawar alone might perhaps take around 190,000 barrels a day off its productive capacity. 

Saudis may well be able to increase production to around the 9.5 mbd mark, plus or minus a few 100 thousand barrels a day.

It is possible the offshore Azerbaijan ACG Megastructure project may bring in some new production this year, as BP's Gunashli field is supposed to come on line this year. The amount to be produced is uncertain, but the megastructure as a whole has the potential to eventually produce around a million barrels a day.

Similarly, BP's deep water Thunder Horse field is due to start up late in 2008, and while ultimate capacity is around 250,000 barrels of crude a day, there is little indication of how much oil will be produced at start up.

However, BP's Angolan deepwater projects should bring an additional 250,000 barrels of oil equivalent to the market this year.

Brazilian deep water production due in 2008 will be helpful. The Marlim Sul stage 4 completion will ultimately bring in an additional 180,000 barrels a day, Espadarte should increase its production rate to maximum production of 100,000 barrels a day, and Golfinho also hits its full production capacity of 100,000 barrels a day in 2008.

The Atlantis platform in the Gulf of Mexico should be rapidly increasing production beyond its 10,000 barrel a day level in late 2007. BP aims to produce 200,000 barrels a day by 2009 from Atlantis, so its 2008 production should be respectable.

Also in the Gulf of Mexico, Chevron's Tahiti platform should produce up to 125,000 barrels a day some time after commencement in mid 2008.

Canada's Horizon Upgrader Phase 1 is expected to produce 110,000 barrels a day of synthetic crude derived from oilsands and natural gas.

Sakhalin basin phase 2  should see the new Piltun-Astokhskoye-B platform hooked up and perhaps reaching the aimed for 70,000 barrels a day.

There are also some smaller fields coming into play, such as the 40,000 barrel a day
Vankorskoye field, due end of 2008 and Umm Shaif, due to add 50,000 barrels a day, starting beginning 2008.

New oil production
Total new oil and expansion oil is hard to estimate. It depends on whether these projects are on time, and what the initial start up production rate is. A very rough guestimate would say there may be 1.5 million barrels a day of new production by the end of the year.

Decline rate in current oil fields
As noted above, conventional global oil production has peaked and is starting to decline. The overall decline rate of oil fields is commonly 'averaged out' at around 5% a year. This means about 3.6 million barrels a day of production will have been lost by years end.

Uncertainties in decline rates
Decline rate is assessed following the known history of mature fields once they have peaked. This is the 'Hubbert Peak'. However, because most fields are now automatically pressurised from first production, the Hubbert curve is artificially 'hung up' until a pressurised field goes into precipitous decline. The Cantarell megafield has been nitrogen gas pressurised to 'rejuventate' the field, but has now reached its limits, and the gas is being re-allocated to nearby fields to 'juice up' their production rates. So relatively sudden decline in megafields may distort the 'normal 4-5% annual decline.

Unfortunately, we don't know when this might happen until it has happened. Cantarell looks as if it is declining at around 15% per annum at the moment, not 5%. Canterell now produces around 1.5 million barrels a day. But it is likely to progressively drop in monthly production over 2008, and end the year producing around 225,000 fewer barrels of oil per day.

Balance of new production versus decline
By years end, there may be an overall drop in global production of crude oil of about 1.5 million barrels a day. However, 'oil equivalent' gas liquids increases of about a million barrels a day leaves a shortfall of about 500,000 barrels.

Increasing production from tar sands, plus oil substitution from ethanol and biodiesel will easily make up the difference, and may make 2008 a year when total liquids were higher than 2007, even when global crude oil production fell.

Uncertainties in production
There are uncertainties in the order of 100,000s of thousands of barrels a day in how much new production will actually make it 'on-line' and when. There is simply no easily found information on the production expansion for 2008 for some potentially very large supplies from the Caspian Sea area, in particular. It is possible that production by end 2008 might be several hundred thousand barrels of oil/oil equivalent higher than end 2007. Just where this production is consumed is another matter.

Uncertainties in above ground factors
Sabotage, particularly in Nigeria, has the ability to shut in up to almost 500,000 barrels a day of oil production. 
An unprovoked USA unilateral declaration of war against Iran is now off the table. The Middle East oil producing regions are less volatile for a variety of reasons, and major disruptions to oil supply are now unlikely. Indeed, 1998 may be a crucial year for consolidation of the USA's Iraqi oil, with the possibility of the beginning of the beginning of expansion and characterisation of what they have got.

Storms in the USA Gulf of Mexico can shut in 1.5 million barrels a day, storms in Mexico can shut in over a million barrels of oil a day, storms in the North Sea can shut in around 400,000 barrels a day.

Recent history suggests that at least 1 million barrels a day will be shut in due to storms in the Gulf of Mexico this year. Shut ins can last from weeks to months.

USA will likely slide into a recession in 2008. The first quarter of the new year will see the USA bank credit inflation unwind. The inevitable result will be inflation, increased unemployment in the building and service sector, no real growth, a rapidly weakening dollar, and the beginning of the return of gold to its proportional parity to oil.

Oil will increase in price to the same extent that the US dollar drops in value. Increased gasoline prices due to an unfavorable exchange rate may deepen the USA recession, dropping demand further, ratcheting the further weakening of the dollar, and ratcheting the dollar-denominated price of oil up further. The value of the dollar has fallen by roughly 24% in the last 5 years. It is likely to slip by around 10% this year. However, it is fundementally backed by USA, Canadian, Mexican, and Iraqi oil. The euro may be increasingly strengthened as it becomes a currency of oil pricing, but it has little practical global effect on preventing currency-value related oil price rises. Except that oil becomes cheaper for europeans, and more expensive for Americans.

The real question is whether or not slow economic conditions and unemployment will reduce USA (in particular) gasoline consumption. At about $US3 per US gallon, the USA pump price is one of the cheapest in the unsubsidised world. Most European countries pay the equivalent of  from US$4 to US$7 per gallon. Recession in USA, for the moment, is unlikely to cut fuel consumption, although it will likely stall growth in gasoline use.

Europe has excellent public transport and high gasoline prices. There is probably not much room for drops in consumption there. Europeans also use far more fuel conservative vehicles than Americans, reducing the impact of price rises.

Relatively little fuel is used for personal transport in China and Japan. China, in particular, will be increasingly exposed to the full (international) price of oil as it increases imports to compensate for its fading giant Daquing field. Domestic subsidies will likely continue to drop, and the trajectory of increasing oil use stall, especially as USA demand for Chinese imports slows due to recession.

Saudi Arabia, China, Mexico, Iran and some other countries subsidise the cost of gasoline.  The subsidies are increasingly burdensome. Although their populations are growing, it may be that some increases in price are passed through to limit demand growth for discretionary travel. On balance, a differentially impacting global recession this year is unlikely to do more than stall demand.

Demand will take all liquid fuels available at a price the buyer can afford. That portion of the world that can afford fuel will get it, those who cannot afford fuel won't. Production is demand.

The world is divided into those who produce some of their own liquid fuel needs, and those who don't. Saudi Arabia produces all its domestic liquid fuel needs, France produces none.

Exports of all liquids (crude, condensate, natural gas plant liquids, refinery gain 'other' liquids) in 2006 was 39,325,000 barrels a day.

The major producers are also increasingly their own best customers. The more oil consumed internally, the less available for export. The trend is to higher and higher internal demand in the important oil exporting countries. Estimates vary, but are currently estimated at between 2% and 5%. This is an annual reduction of between 786,500 and 1,966,250 barrels of oil and oil equivalent a year. Taking the mid point, if about 1.3 million barrels a day is taken off the 'for sale' shelf, then this means tar sands, ethanol, and uncertainties in new production from large projects coming on line will have to make up the difference. This remains to be seen, but the full 1.3 mbd is unlikely to be compensated for.


Speculations on price are increasingly pointless due to the large number of important uncertainties affecting supply and willingness to buy.

The highest internal consumption by major exporters comes in the last third of the year. This is also the hurricane season, but it is also when the greatest new supply from megaprojects is likely to arrive.

Demand and supply are tight under these conditions. Therefore, there is no fundemental reason for crude prices to fall.

The greatest adjustment is likely in the first third of 2008, when the banking debacle unwinds and the US dollar will fall most steeply. Crude may rise to around $US105, with sweet crudes in some regions hitting $US110 to compensate for a 10% fall in the USA dollar (i.e. no fundemental rise in price over late 2007).

Mid year may see enough increased internal consumption by exporting countries to have an effect on price if mega projects are slow in bringing in extra crude. Crude could be bid up by a small amount, perhaps to $US110 to $US115.

The end of the year is too hard to call. Supplies may comfortably match demand and crude fall back to $US105, or mid year prices may form the new floor.

Oil prices are expected to be volatile, with temporary spikes both up and down.

Supply and demand mismatch is now not likely to happen due to the continuing recession. Paradoxically, while oil and condensate may be down by perhaps 1 - 2 million barrels a day by year end, reduced demand plus increased production from unconventional oil plus gas condensate is likely to hold liquid transport fuel supply at about 2008 levels.

The large Mexican Ku-Maloob-Zaap field may now be on-line with 800,000 barrels a day, but this is heavy oil, requiring specialist refineries - which are already fully engaged in dealing with heavy oils from Saudi fields. The massive Cantarell field may now be producing less than this itself, adding up to a shortfall of about 1.5 million barrels of oil a day from Mexico alone (over 2005 production), with much of this consumed within Mexico.

The Middle East Gulf states as a whole (including Iraq) are probably at or near peak of production by now, the region possibly producing 20 million barrels a day, a little more than 2004.

The actual production levels from newly reworked large Saudi fields can now be measured.

If the new Saudi projects don't fulfill their promise, Ghawar is now confirmed as a slow producer, (2006 Saudi Arabian total production of less than 8 million barrels a day being the 'new reality') and Saudi Arabia produces a nett of around 7 million barrels a day.

Russia is unlikely to have achieved its goal of producing 11 million barrels of oil a day (surpassing Saudi Arabia as the worlds largest producer). Larger fields coming on-stream will only have added maybe 1.5 million barrels a day, but the decline in the very large mature fields will almost certainly cancel the new production out. Russia's overall decline rate is likely to be steeper than Saudi Arabia - when is very uncertain, with a good possibility it may be showing now, and it is possible production may drop by 1 million barrels a day by end 2009.

The world decline in production of oil plus condensate remains around 4%. This means that only the increasing production of liquids in 'wet' natural gas, plus increased non-conventional oil might prevent an actual overall decline in available fuels.

Worst case 'light'

- Saudi fields lose more pumping capacity than anticipated (for example, Ghawar might fail rapidly), and the extra supply is in heavy oils, not light oils. Drop in available supply of at least 100 million tonnes a year triggers a 50% a barrel price increase, perhaps to a rather volatile band of $US100 to $US200 (in the case of rapidly depreciating USA dollars).

- Russian giant fields also commence to fade, no increased is available on the world markets.

There will be no unused capacity to increase supply to compensate. Speculators may 'spike' it higher on the futures market.

Countervailing this, price-based cuts in oil consumption, plus liquids from large new central Eurasian gas fields help dampen price swings.

Norwegian gas production might increase by about half (delays at Norways Snohvit gas field in the Barents Sea, Corrib field in Ireland, and at the Irania South Pars field may reduce this projection), but decline in oil production is more important - Norway is the worlds third biggest oil exporter after Saudi Arabia and Russia.

Imported overseas LNG may make up the shortfall in USA and Canadian gas consumption by this date, but this is extremely unlikely as urgent government action would have to have been undertaken at least 5 years ago. But if USA does not yet have major LNG terminals in place to compensate for declining US and Canadian natural gas production used in gas fired electricity generation plants, electricity interruptions may be a fact of life, with serious effects on the economy.

Worst case 'heavy'

the Canterell fields oil cap shrinks to the point where underlying water floods the horizontal wells that have been holding up high volume production. Production would then 'fall off the cliff-face'. It is a matter of record that Canterell is now near this point, with the decline rate now 20%. Mexico currently (writing at january 2009) sends about 1.1 million barrels a day to USA, down about 300,000 barrels a day over last years average. If not for the USA recession, this would have had to be made up from the world market. If Canterells failure accelerates, it will have a dramatic effect on oil prices and affect both the velocity and impact of recession in the USA.

- Saudi fields are producing a nett of around 7 million barrels a day as the Ghawar megafield fading is finally revealed.

- a similar effect may occur with Russias aging, water re-pressurised, giant fields at the same time. This would tip the world into 'instant depression'. When slashed demand equilibriated with supply, there would still be no relief.

The price band for oil under these conditions is not likely to be much different than worst case light, as depression in oil economies destroys jobs and slashes private car use, making petroleum unaffordable for many people and holding the price at the pump. There is a possibility that petroluem products may rise less in price than in the 'worst case light' scenario, perhaps to 'only' $US75 - $US95 band by years end.

Oil is still king, and natural gas is not easily transportable, and does not become a cheap substitute. Infrastructure to deliver liquified natural gas - everywhere, from the export dock to the consumers car engine - is so tiny that the vast reservoirs of natural gas cannot substitute for petrol. USA will have to have major large diameter natural gas supply pipelines from Alaska or the Canadian Arctic in place to fuel its electricity generation, or declining US and Canadian supply will see electricity shortages (this is now offset by production from the Barnett shales - but low gas prices are destroying the viability of on-going drilling. Such major and expensive projects would have to have been started in 2000 to be providing gas now. They weren't.

USA alone may have to import around 14 billion cubic feet of natural gas a day (2006 consumption is around 62 billion cubic feet a day, of that 51 bcf  is 'home grown'). Domestic USA gas will be in overall decline. Even with the pipelines in place, there may be interruption. Global warming is melting Arctic permafrost, causing significant local landslips, which may endanger security of supply.

The production peak of crude oil plus condensate that occured in late 2007/ beginning 2008 now slides into production decline. More importantly, the state-owned Saudi fields start their slow production decline. In a very best case, Libyas opening up to exploration may add 2 million or more barrels a day of new oil by now, but this is likely to best offset by declines in Libyas existing fields. Smaller middle east Gulf states continue a gentle overall decline in production of conventional cheap oil.

Russia, one of the most important volume producers, may have static or declining oil production (and with more used domestically, less is available for export), and Saudi Arabia, the other big player, may have added an extra half million barrels a day.

Angola may have almost doubled its production (relative 2005) to nearly 3 million barrels a day.

New oil production from the Gulf of Mexico may be an additional 400,000 barrels a day by now.

USA oil field production is likely to have declined by a bit less than a million barrels a day by now.

Norways production drop will be similarly severe, at maybe 800,000 barrels a day less.

Mexico's nett oil production is likely to be down by at least 600,000 barrels a day to below 2.5 million barrels a day. If decline rates have been severe, Mexico may even be a nett oil importer and with export volumes dropping by maybe 20% a year or more from here on. This equates to a fall in exports of around 2.5 million barrels for this year.
UK down by around 500,000 barrels a day (if the 2006 decline rates held, North sea oil - Norway, Denmark and UK- may be down to around 3 million barrels a day of oil and condensates, a 1 million barrel a day drop in capacity relative 2006).

Irans production is likely to have dropped by 300,000 barrels a day (unless aggressive pressurisation has now commenced), and China's production is also likely to be down by a similar amount.

Nigeria's production may be down by 200,000 barrels a day.

Overall, once increased production from newly developed oilfields and decreased production from older oilfields are added up, there is likely to be about 80 - 87 million barrels a day of oil and other liquid fuels being produced in the world, which is around the 2008 level.  Increased deepwater and gas liquids production makes up for decline in aging mega fileds. Global recession will destroy 'excess' demand, so there may not be an unmet demand for oil and oil products keeping prices high.

Crude might remain around $US100 - $200 barrel in 2010 - due to deflationary recession dropping demand and price. If deflationary recession turns to depression, oil might fall to around $US60 to $US80.

Plummeting consumption is likely to stabilise the price, at that price band. Fundamental 'base-line' consumption for essential services and functions (agriculture, food distribution, civil services) will always be there almost no matter what price the fuel. Most new oil extraction projects are uneconomic above around $55 a barrel. 'Luxury' demand all but disappears. Infrastructural and economically viable industry demand alone supports it.

We are discussing the end of cheap oil, which has, in this worst case scenario, arrived about 2010. Recession, interspersed with brief recoveries, is inevitable under these assumptions.

If the deepwater plays and gas liquid increases from new gas fields reach hoped for levels, 2010 will be the final 'plateau' year before the long decline.

Beyond 2010

By the end of 2011, world nett crude oil (plus condensates) production may be around 83 to 88 million barrels a day, either a little less than recent years, or perhaps a whisker more. In a global depression, production will be lower, as demand will be lower. Demand should continue to fall due to reduced economic activity, as it did in the early '70's. The difference this time is that there is no increase in supply to draw the world back out of a deepening recession. And the drop-off in exported oil from Mexico (in particular) may start to bite in USA, in spite of reduced demand.

Huge effort is expended on energy efficiency, conversion of vehicles to LPG and CNG, in particular. Gas reserves begin to be fully exploited. Norways gas production reaches its peak in 2011, a level twice that of 2005.

Alaskan gas may provide the USA with a temporary respite from its gas/electricity shortfall crisis. Canadian gas may not be available in the high volume existing in 2006 as Canada both diversifies its customers to include China, and begins to conserve gas resources for an uncertain future.

Many countries will be hugely gas-dependant as time goes by. UK gas fields in the North sea will now be producing only a third the amount of gas they did in 2005. But UK hopes to generate 70% of its electricity from gas by 2020.

Liquification of gas, liquification of coal reserves, expansion of extraction from non-conventional and remote oil sources is intensified. While conversion to CNG and LPG has a relatively short lead time, most other projects have a very large lead time, and require massive amounts of capital in a world economy hit by recession. For example, the USA obtains 3% of its gas supply as LNG, but by 2020 around 25% of USA gas will 'have to be' LNG imports from overseas. The vastly expensive terminals and distribution networks must be in place before domestic shortfall in natural gas becomes critical.

The vast Middle East Gulf fields probably have started their slow decline around 2008, and production now is likely to be not much less than 2004 (19.4 million barrels a day), but decline rates of perhaps 3% year on year are likely to follow. The biggest possible field that 'might' be found near or soon after 2010 might be offshore Saudi Arabia, at posssible reserves of 2.2 billion barrels. Far below the reserves of the worlds largest field, Gharwar, at 115 billion barrels, but obviously still useful.

The 1974 recession was quite severe, but relatively short lived when oil supplies returned to normal from an OPEC engineered 7% oil supply shortfall.

Historically, recessions in the eighteen hundreds have lasted for a long as several decades, until new energy forms transformed technology and production. This will not happen this time - at least in the sense we expect.

It would be reasonable to suppose that recession and then depression will drag on for the forseeable future, interspersed with small rallies as gas infrastructure finally comes widely available.

EU oil imports will have grown dramatically. Oil producing countries will be exporting significantly less. Overall liquid fuel supplies will likely be staring to decline in absolute terms. Either end 2012 or 2013 may be the inflection point of the start of absolute decline in liquid transport fuel availability.

Norways ability to be the most important contributor to meet even static UK gas needs decline severely after 2014.

But UK hopes to generate 70% of its electricity from gas by 2020. Almost all that gas will be imported - mainly from Norway, Qatar, Algeria and Russia. But Norways ability to be the most important contributor to meet even static UK gas needs declined severely after 2014. Norway would have to supply UK with 50 billion cubic metres of gas a year at a time its fields are diminishing. This may not be possible, or even politically desirable (from Norways point of view, looking ahead). UK's gas needs at this time will not be able to be met. Norway gas, domestic fields, and LNG imports will not be enough. There is unlikely to be other supply, unless UK has a large share of control of Iraqi (or Iranian) gas. At the same time, there will be intense global competition for LNG, both for electricty generation and for domestic cooking. Long term contracts signed earlier in the decade will have long since locked up much of the high volume supply.

Ultimately, economies will likely become localised. Distances will expand as transport beds down into slower forms. Many things will happen more slowly as labour becomes more cost effective than machinery for some jobs. Societies around the world will critically focus on the energy and transport cost of all goods and services. Society will seek small scale, distributed, and localised sustainable energy sources alongside large national non-renewable energy projects.

The adjustment will take several generations, but with the pain and despair will undoubtedly come challenges met with education, critical thinking, innovation, enterprise, imagination, and determination. Dictatorships, quasi dictatorships, and weakly democratic countries will fare worst in the long term. Engaged, truly fully representative democracies will tend to cope best in the long run.

In those democracies, as the ultimately unsustainable fossil hydrocarbon economy fades and dies, the mixed energy sustainable economy will be born - and in time grow both strong, and forever young.

 © Copyright 2005 The NaturalHub
Version 20 2009

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