The inevitable oil squeeze draws near

Apr 21, 2005 02:00 AM

by David R. Francis

Goodbye, cheap gasoline. The days of tooling around in automobiles with nary a thought of the cost are probably over.
That's because the world's oil production is rapidly approaching its peak. At that point, the world will be faced with a steady decline in supply just as demand for petroleum takes off in places such as China and India.

Already, production in Britain, Norway, and 16 other major oil-producing nations is slipping, analysts say. Now comes a report that the world's biggest oil field -- Gharwar in Saudi Arabia -- has started to decline.
"There are lots of converging signs that we are in for serious oil supply problems," says Jim Meyer, an expert at London's Oil Depletion Analysis Centre (ODAC). "We will not see $ 20, $ 30, even $ 40 a barrel oil ever again."

The report about Gharwar's decline has caused a stir. Donald Coxe, a global portfolio strategist with the Bank of Montreal in Chicago, reached that conclusion late March. Though not the first to question Gharwar's output, Mr Coxe's report caught the eye of Al Jazeera, the popular Arab television network. An article on its website included a denial by Saudi Aramco's CEO, Abdallah Jum'ah. Instead of decline, he talked of boosting Saudi output to 12 mm bpd by 2012 and 15 mm bpd in the "long term," up from 9 mm bpd currently.
If the field isn't in decline, Coxe asks, why has Aramco been delivering less profitable heavy oil from another field rather than Gharwar's light oil, considered more desirable by most refineries?

In the past year, the number of experts seeing an imminent peak in world oil output has risen sharply. A dozen or so now see it coming by no later than 2012, says Mr Meyer. If that happens, today's oil price of $ 50 a barrel may seem cheap in the years ahead. At its worst, rising oil prices could cause a world economic recession -- not to mention lightening the pocketbooks of millions in the United States and elsewhere who rely on cars for daily transportation.
Finance officialsfrom seven major industrial nations, meeting in Washington, tried to calm stock markets by pledging action to deal with rising energy prices. In his weekly radio address the same day, President Bush made a pitch for passage of the energy bill before Congress.
"America's prosperity depends on reliable, affordable, and secure sources of energy," he said, noting that the US imports more than half of its oil.

The world currently produces 82.5 mm bpd. But it's not clear what politicians can do to boost oil supplies.
Among the 18 major oil-producing nations that have already peaked are Indonesia, Gabon, Oman, Britain, Venezuela, Norway, and the US, according to ODAC. Added up, oil output from these nations dropped by about 1.1 mm bpd last year. Further, in the next two or three years, output will start to fall in Brunei, China, Denmark, Malaysia, India, and Mexico, ODAC concludes. Including these six nations brings the decline to 1.3 mm to 1.4 mm bpd.

At the same time, world demand for oil is rising. It rose 3.4 % last year, or by 2.7 mm bpd For 2005, the International Energy Agency in Paris estimates demand will rise another 1.8 mm bpd. That means any new finds will have to cover both falling supply from current fields and rising demand. Meyer says the 22 largest announced finds are expected to boost global output by 2.6 mm bpd this year, rising to 3.4 mm by 2007, then falling to 1.2 mm by 2010.
"After 2007, we can't see enough new supplies to meet almost any reasonable level of demand growth," says Meyer.

Even 1 % growth in world demand, combined with more oil fields in decline after reaching peak production, could lead to insufficient oil supplies by 2008. Many economists expect rising prices to restrain demand for oil and encourage production and use of other energy sources. But Meyer notes that such developments take years to become meaningful. Moreover, perhaps 95 % of oil in the world has already been discovered, though not all exploited.
The Saudis talk of eventually boosting capacity to 15 mm bpd, and maintaining that level for 50 years.
"A decline in any given area is offset by production in new areas," says Saudi Aramco spokesman Stephen Sawyer in Houston.

But there is increasing speculation that this goal may not be reached. Coxe calculates that production in existing Saudi fields will decline by 2.5 mm bpd by 2012. The Saudis also say they need $ 32 a barrel to justify new production, far above the cost of old Saudi oil at around $ 8 per barrel.
"The kingdom's decline rate will be among the world's fastest as this decade wanes," maintains Coxe.
If so, the world's supply of oil will drop rapidly -- unless crash programs are pushed to slash petroleum consumption, mostly by cars and trucks.

Source: Christian Science Monitor
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