Elsevier

Energy Policy

Volume 36, Issue 2, February 2008, Pages 881-889
Energy Policy

Mitigation of maximum world oil production: Shortage scenarios

https://doi.org/10.1016/j.enpol.2007.11.009Get rights and content

Abstract

A framework is developed for planning the mitigation of the oil shortages that will be caused by world oil production reaching a maximum and going into decline. 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. As a limiting case for decline rates, giant fields were examined. Actual oil production from Europe and North America indicated 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 pseudoplateaus. Consideration of resource nationalism posits an Oil Exporter Withholding Scenario, which could potentially overwhelm all other considerations. Three scenarios for mitigation planning resulted from this 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 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 potentially more rapidly than 2–5% per year, creating the most dire world economic impacts.

Introduction

A framework is needed for planning the mitigation of the 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. This analysis assumes it is not.

In dealing with these 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, this analysis involves consideration of order of magnitude economics, past real-world experience, forecasts of future world oil production, and possible oil exporter behaviors.

Considerations of oil shortages, as distinguished from oil price increases, necessitates dealing in an area in which there is no recent experience. 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” (Gates et al., 2005).

In this context, relatively small percentage changes are hugely meaningful. For example, the 3% decrease in US 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 improvements 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 (Hirsch et al., 2005). 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 very best of conditions. Thus, small decreases in world oil production can have large economic impacts and require very large levels of mitigation hardware and investment.

Section snippets

The nexus of oil supply and GDP—a world economic impact estimate

It is said that oil is the life-blood of our modern civilization. Indeed, world oil production has increased in tandem with world economic development for decades. This relationship is illustrated in Fig. 1, which shows a measure of world GDP growth and world oil production growth over the last 20 years (EIA, 2007a; IMF, 2007).

Our interest is in identifying an approximate relationship between these two rates of change on the downside, i.e., when world oil supply falls short of world demand.

Possible world oil production patterns

Fig. 2 shows three simplified oil production patterns associated with oil production from giant oil fields, large regions, and various forecasts. In a sense, these patterns represent a continuum from sharp maximum to plateaued maximum, followed by continuing declines.

When planning mitigation, particular attention must be paid to longer-term decline rates. As recently noted by GAO (2007), “the rate of decline after a peak is an important consideration because a decline that is more abrupt will

The characteristics of giant oil fields

Giant oil fields are responsible for over 60% of world conventional oil production (Robelius, 2007), and they provide an important benchmark when considering long-term world oil decline rates. Most giant fields were discovered decades ago, have long since passed their maximum oil production, and are in relatively monotonic decline. Decline rates for a number of reasonably well-managed fields vary in the 8–16% range. The world is unlikely to be subjected to such high rates of decline, because

Behaviors of very large oil producing regions

There is no substitute for real-world experience to gain insight into what might happen in the future. Selection of regional boundaries should be based primarily on geological considerations, which can be very different from national boundaries. Europe and North America are reasonably contiguous and bounded. Consideration of other regions is extremely difficult because of the complexities of oil production withholding (OPEC), large-scale mismanagement, political upheaval, etc.

Europe and North

Preliminary conclusions

Oil production decline rates in giant oil fields can be very high (8–16% per year), but experience in North America and Europe demonstrates that large region, post maximum oil production decline rates can be more moderate (3–5% per year).

In North America, maximum production occurred with essentially no warning and was followed by a decrease of about 15% over the course of 5 years. If that experience were to be repeated worldwide, the economic consequences would be dire, based on our correlation

The changed world oil industry

Past oil production in North America, Europe, and some other regions of the world was generally managed by oil companies operating according to free-market values, which prized rapid, efficient, and profitable operations for the benefit of their stakeholders. Most forecasts of future world oil production assume that future world oil producers will be similarly motivated, and a major assumption is that geology will be the ultimate limiting factor. In other words, what can be produced in the

Conclusions

Our purpose was to develop a framework for planning mitigation of future world oil shortages. From previous experience and various analyses, we concluded that world oil shortages will degrade world GDP and that unity is a reasonable assumption for the relationship between percent decline in world oil supply and percent decline in world GDP, i.e., a 1% decrease in world oil supply could conceivably produce a 1% decrease in world GDP.

Since the majority of world oil supply comes from giant oil

Acknowledgments

Drafts of this study were considered by Roger Bezdek and Robert Wendling, MISI, Larry Kummer, UBS, Colin Campbell, ASPO, Jean Laherrere, Total retired, Jeremy Gilbert, BP retired, Kjell Aleklett, Uppsala University, James Schlesinger, Mitre Corporation, and Yushi Fujita, Toyota. Their comments are greatly appreciated.

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