Oil prices: it's not about the geology

This article by Nils Pratley was in this weekend's Observer. It mainly concentrates on the influence of OPEC, the cartel that controls around 40% of the worlds oil supply. It re-iterates that oil prices generally don't have too much to do with how much oil there is available to produce: it's more about how much actually gets produced, for reasons that tend to be economic and geopolitical as much as geological.

The oil price is back down to $107.30 today, from a high of $147 in early July. That's a 20% fall in just two months. This has little do with the state of oil production, and everything to do with speculation. Now the OPEC countries have got used to oil at $100+ a barrel, they're ready to take action, by cutting production, to keep oil prices high. And, of course, the west needs relatively high prices to drive investment in technically and/or politically difficult fields, now that most of the easy oil has been found.

It's a strange situation. If there was a cartel that was fixing prices in, say, the British airline industry, something would be done about it. But oil is not like other commodities.

One thing in the article that bothered me a little was this:

The Saudis guard closely their data on the oil reserves and production capability. Why? "Peak oil" theorists argue it's because the big reserves aren't as big as advertised.

This makes 'peak oil' sound like a conspiracy theory. In fact, the peak oil hypothesis says nothing about the size of Saudi Arabian reserves. What it says is that global oil production will follow a similar pattern to sub-sets of global production (such as production from single basin, or a single country): that is, it will increase until roughly 50% of the oil has been produced, and then it will fall. Some people, who you might call early peak oil theorists, think that OPEC reserves are overstated, but that doesn't alter the fact that oil production will peak: it just shifts the timing of the peak.

Plateau oil?

How much oil is left? Are we looking at a looming supply crunch? This is one of the biggest questions in geopolitics now, and it's partly a question of petroleum geology. The problem is that arriving at an estimate of how much oil might be left to produce is extremely difficult, because there are so many factors to take into account, and most of those factors are subject to large uncertainties. Improvements in technology mean more oil is recoverable. Changes in the price of oil affect which fields it is economical to produce from. The fact that supply is partly controlled by the OPEC cartel, itself subject to political and economical considerations, is an important factor. Various countries have been less than truthful about what reserves they have. Advances in producing from unconventional sources (e.g. shale oil, gas hydrates) will increase potential reserves, but not without environmental cost. Replacements such as biofuels may be able to take up some of the demand (again, subject to political factors).

A recent Hedberg conference of the American Association of Petroleum Geologists (AAPG) tried to address this issue. The AAPG reported the results at their conference in sunny Long Beach, CA, where I happened to be lugging an enormous poster around. You can find a summary of the results here. Three types of additions to future reserves were addressed: improvements in recovery from existing fields, new discoveries, and new unconventional resources. The conference didn't look at gas-to-oil or coal-to-oil conversions, or oil substitutes such as biofuels.

It makes for uneasy reading. While the conference concluded that peak oil was not 'imminent', it was not far away either. Oil production was predicted to reach a plateau sometime between 2020 and 2040, lasting for 25 to 30 years. Production will then inexorably fall. Because consumption is now so high, even this would require a mammoth effort from the oil industry. And a supply crunch is likely even earlier, as demand continues to increase and the rate of increasing production falls off before the plateau.

This is good news for petroleum geologists, who are not going to be out of work (although we are probably going to have work in more politically unstable and inaccessible areas), but it isn't particularly good news for anyone else. I don't see any evidence for western governments having a plan B that is going to be of much help before 2020.

I think this is interesting, because the 'peak oil' hypothesis is often dismissed by oil industry insiders (but generally not by petroleum geologists). Here's a large group of experts coming to the conclusion that peak oil (or at least plateau oil) is real.