World Oil Supply Outlook

World Oil Supply Outlook

It has been said that the best economic forecast ever made was by a Shell geologist by the name of King Hubbert in 1956 when he predicted that US oil production from the lower 48 states would peak in 1970.

It has been said that the best economic forecast ever made was by a Shell geologist by the name of King Hubbert in 1956 when he predicted that US oil production from the lower 48 states would peak in 1970.

Mr Hubbert used a methodology called the logistic decline plot based on the mathematics of extraction of a finite resource. US oil production duly peaked in 1970. The same methodology can be used to predict world oil production. Figure 1 shows a logistic decline plot of world oil production from 1860:

 

 Figure 1:  World Oil Production Logistic Decline Plot

Figure 1: World Oil Production Logistic Decline Plot

Reflecting the extraction of a finite resource, after some initial volatility, the plot settles down to a straight line. The intersection of that straight line with the x axis is the total volume of oil initially in the system. Half that figure is the year of peak production, in this case 2005. The oil price started rising faster from June 2004 as a result of the oil market going from inherent oversupply to permanent tightness. This does not include traditionally higher cost liquid fuel sources such as oil sands, oil shale, shale oil and condensate.

 

Figure 2:  World Oil Production Less US Production 2002 – 2014

Figure 2: World Oil Production Less US Production 2002 – 2014

As shown in Figure 2, oil production outside the United States peaked a decade ago and is now in decline. Oil supply in the United States has risen in the last few years due to high oil prices and low cost finance. The oil industry there has taken on a lot of debt to fund the growth of the industry there. With drilling being curtailed in the US due to the current low oil price, US oil production will now follow the rest of the world into long term decline as shown in Figure 3 following:

 

Figure 3:  World Oil Production 1965 – 2030

Figure 3: World Oil Production 1965 – 2030

Figure 3 shows Hubbert’s peak in US oil production in 1970 and the European and Mexican production peaks. Production from the Middle East is expected to plateau over the next 20 years and thus oil supply will be further concentrated in the Middle East. The decline rate from here is expected to be about 1.5 million barrels per day per annum. One million barrels per day of oil production equates to 42 million tonnes per annum of oil production in energy terms. Thus for LNG production to offset the decline in oil production, LNG production would have to increase at about 60 million tonnes per annum for more than 30 years.