Has oil production peaked?

WHEN THE PRICE OF OIL climbed above $50 a barrel in late 2004, public attention began to focus on the adequacy of world oil supplies, specifically on when production would peak and then begin to decline. Analysts are far from a consensus on this issue, but several prominent ones now believe that the oil peak is imminent. Oil completely shaped our 20th-century civilization, affecting every facet of the economy, from the mechanization of agriculture to air travel. When production turns downward, it will be a seismic economic event, creating a world unlike any we have known during our lifetimes. Indeed, when historians write about this period in history, they may well distinguish between before peak oil (BPO) and after peak oil (APO).

The oil prospect can be analyzed in several different ways. One approach--use of the reserves-production relationship to gain a sense of future production trends--was pioneered several decades ago by the legendary geologist King Hubbert. Given the nature of oil production, Hubbert theorized that the time lag between the peaking of new discoveries and production was predictable. Noting that the discovery of new reserves in the U.S. had peaked around 1930, he predicted that U.S. oil production would peak in 1970. He hit it right on the head.

A second approach, separating the world's principal oil-producing countries into two groups--those where production is falling and those where it still is rising--is illuminating. Of the 23 leading oil producers, output appears to have peaked in 15. The post-peak countries range from the U.S. (the only country other than Saudi Arabia ever to pump more than 9,000,000 barrels per day) and Venezuela (where oil production topped out in 1970) to the two North Sea oil producers, the United Kingdom and Norway, where production crested in 1999 and 2000, respectively. U.S. oil output, which peaked at 9,600,000 barrels a day in 1970, dropped to 5,400,000 in 2004. Venezuela's output has dropped 31% since 1970.

The eight pre-peak nations are dominated by the world's leading oil producers, Saudi Arabia and Russia. Other countries with substantial potential for increasing production are Canada, largely because of its tar sands, and Kazakhstan, which still is developing its oil resources. The other four pre-peakers are Algeria, Angola, China, and Mexico.

The biggest question mark among these "elite eight" is Saudi Arabia. Its production technically peaked in 1980 at 9,900,000 barrels a day. Today, output nearly is 1,000,000 barrels a day below that. It is included as a country with rising production merely on the basis of statements by Saudi officials that the nation could produce far more if it wished to do so. However, some analysts doubt whether the Saudis can raise output much beyond current production. Some of its older oil fields largely are depleted, and it remains to be seen whether pumping from new ones will be sufficient to more than offset the loss.

This analysis comes down to whether production actually will in crease enough in the eight pre-peak countries to offset the declines under way in the 15 states where production already has reached its zenith. In volume of output, the two groups essentially have the same total production capacity. If production begins to fall in any one of the eight, however, world output could decline.

A third way to consider oil production prospects is to look at the actions of the major oil companies themselves. While some CEOs sound quite bullish about future growth, their actions suggest a less-confident outlook. One bit of evidence is the decision by leading oil companies to invest heavily in buying up their own stocks. ExxonMobil, for example, with the largest quarterly profit of any company on record--$10,700,000,000 in the last quarter of 2005--invested nearly $10,000,-000,000 to buy back large portions of its own stock. ChevronTexaco used $2,500,000,000 of its profits to buy back stock as well. With little new oil to be discovered and world demand rising rapidly, companies apparently realize that their reserves will become even more valuable in the future.

Closely related to this behavior is the lack of any substantial increases in exploration and development. This suggests that the companies agree with petroleum geologists who maintain that 95% of all the oil in the world already has been discovered. "The whole world has now been seismically searched and picked over," says geologist Colin Campbell. "Geological knowledge has improved enormously in the past 30 years and it is almost inconceivable now that major fields remain to be found." This also implies that it may take a lot of costly exploration and drilling to find that remaining five percent.

This shrinkage of reserves is strikingly evident in the ratio between new oil discoveries and production. Among the companies reporting that their oil production greatly exceeds new discoveries are Royal Dutch/Shell, ChevronTexaco, and Conoco-Phillips. On a global scale, geologist Walter Youngquist, author of GeoDestinies: The Inevitable Control of Earth Resources Over Nations and Individuals, notes that, in 2004, the world produced 30,500,000,000 barrels but discovered only 7,500,000,000.