November 13, 2012
2012 World Energy Outlook from the International Energy Agency
The United States is projected to become the largest global oil producer before 2020, exceeding Saudi Arabia until the mid-2020s. At the same time, new fuel-efficiency measures in transport begin to curb US oil demand. The result is a continued fall in US oil imports, to the extent that North America becomes a net oil exporter around 2030.
Stuart Staniford makes an interesting observation on the above reported numbers. The graph suggests that the U.S. will be producing a little over 10 mb/d in 2020. If that's enough to overtake Saudi Arabia, it means that Saudi production is never going to get anywhere near the 15.4 mb/d that the kingdom had been predicted to reach in 2020 according to the IEA's World Energy Outlook 2005 released seven years ago.
The pink or red regions in the above graph appear to be reporting the sum of field production, lease condensate, and natural gas liquids. The latter by 2011 had come to account for 28% of the total, and you can't drive your car on ngl. It's also interesting to note that according to the graph, U.S. production is expected in 2020 to get back to the level previously seen in 1985-- or about 800,000 b/d below the all-time U.S. peak in 1970-- before beginning to decline again after 2020. And all of the gain between now and 2020 comes from unconventional production, presumably largely oil and ngl from tight formations. Again quoting Stuart:
I am less persuaded myself that using a thousand oil rigs to generate an extra one million barrels per day of oil is necessarily a sign of a large and long-term sustainable increase in US oil production (as opposed to, say, frenzied scraping of the bottom of the barrel). But, still, I'm not certain beyond a reasonable doubt just how deep this particular barrel can be scraped.
Another interesting number to compare to this 10 mb/d production anticipated for the U.S. in 2020 is the 18.9 mb/d of crude oil and petroleum products currently being consumed by the United States. If the U.S. is indeed to approach energy independence, it mostly must be due to a significant drop in U.S. demand for oil, perhaps resulting in part from increased use of natural gas for transportation. And conservation of this impressive magnitude is hardly the outcome one would associate with a scenario of falling oil prices over the next decade.
Finally, another item from the WEO summary bears noting: Iraq accounts for 45% of the growth in total world production that IEA is forecasting between now and 2035. I commented on the potential for future production from Iraq earlier. Here I will only repeat that one assumption of any such forecast is that Iraq is going to be a substantially more stable place over the next decade than it has been over the last three.
None of this is to deny that U.S. production of oil and gas from tight formations is going to bring significant economic benefits to the United States, nor that the geologic potential for a remarkable transformation in Iraq could well be there. But I think anyone who concludes from this report that we are about to return to the kind of world we inhabited in 1970 may be in for an unpleasant surprise.
Posted by James Hamilton at November 13, 2012 08:27 AMdigg this | reddit
And just to make life more interesting, we have a remarkably fact-free item, from the opinion pages of the Wall Street Journal. Note the numbers given for current US "production," a term which is conveniently not defined, but the clear implication is that they are talking about oil production.
Saudi America: The U.S. will be the world's leading energy producer, if we allow it.
Sometimes the revolution politicians seek isn't the one they get. Consider the irony—and the opportunity—in Monday's report that the U.S. is likely to surpass Saudi Arabia as the world's largest oil producer as early as 2020.
In its annual world energy outlook, the Paris-based International Energy Agency (IEA) says the global energy map "is being redrawn by the resurgence in oil and gas production in the United States."
The U.S. will increase its production to about 23 million barrels a day in 10 years from about 18 million barrels a day now, the IEA predicts. That's more optimistic than current U.S. government estimates and a change from a year ago when the IEA said Russia and the Saudis would vie for number one . . .
Historians will one day marvel that so much political and financial capital was invested in a green-energy revolution at the very moment a fossil fuel revolution was aborning. But politicians failing to spot the trend until they start taking credit for it is an old story. Let's hope they don't ruin it now that they've noticed.
I suppose that they may be counting total liquids plus natural gas in terms of Barrels of Oil Equivalent (BOE), or they may be confusing consumption with production.
But I suspect that a fair number of Americans--millions?--now think that the US is producing 18 mbpd of oil. Note that several people, including yours truly, pointed out, in the comments section, the error in the opinion piece, but no correction so far.
Posted by: Jeffrey J. Brown at November 13, 2012 09:41 AM
Consider the WEO forecast global production growth rate and the implicit global GDP growth rate associated with that
yields a production CAGR of ~0.6% and ballpark global GDP growth of ~1.2% annually (ignoring compositional changes of that production profile).
Seems like a bigger story in some ways.
Posted by: energyecon at November 13, 2012 10:17 AM
The increase in US crude oil production (Crude + Condensate, EIA), from 5.4 mbpd in 2004, which was our production level prior to the 2005 Gulf Coast hurricanes, to 5.7 mbpd in 2011, and to an average production rate in excess of 6.0 mbpd in 2012, is good news for the US economy.
However, it is critically important to understand that the overall rate of decline in oil production from existing US wellbores is going up, as an increasing percentage of US crude oil production comes from shale oil plays, which have a very high decline rate, much higher than the older conventional fields, such as the Prudhoe Bay Field in Alaska. Inevitably this results in the “Red Queen” problem, where US oil producers have to run faster and faster, just to stay in place.
Meanwhile, the primary factor affecting US consumers at the pump is a measurable post-2005 decline in Global Net Exports of oil (GNE*), with developing countries, led by China, so far consuming an increase share of a declining volume of GNE.
This bidding war for net oil exports drove the annual global (Brent) price of oil from $55 in 2005 to $111 in 2011. Note that US consumers are almost fully exposed to the global oil price, since Mid-Continent refiners are paying West Texas Intermediate (WTI) based prices for crude oil, but largely charging Brent based prices for refined product.
As Yogi Berra is reported to have said, “It’s tough to make predictions, especially about the future,” but when we review recent annual net export data, from 2005 to 2011, the trend is extremely worrisome, especially in the context of conventional wisdom that there does not appear to be a problem with a virtually infinite rate of increase in our consumption of a finite fossil fuel resource base.
In 2005, the ratio of GNE to Chindia’s (China + India’s) Net Imports of oil (CNI) was 8.9. In other words, in 2005 for every barrel of oil that the Chindia region net imported, there were 8.9 barrels of GNE (Global Net Exports of oil). In 2011, this ratio had fallen to only 5.3, and the rate of decline in the ratio has recently accelerated. At the 2005 to 2011 rate of decline in the GNE to CNI ratio, the Chindia region alone would theoretically consume 100% of GNE in only 18 years.
While the increase in US crude oil production is very helpful, and important to the US economy, the fact remains that the US, and most other net oil importing OECD countries, are gradually being priced out of the market for exported oil. And it remains to be seen how long the US can maintain an increase in US crude oil production, when the bulk of new supply comes from probably the highest decline rate wells we have ever seen in the US.
In any case, for an average US consumer, the price at the pump, for the foreseeable future, would appear to be largely driven by the fact that the developing countries, led by China, have been consuming and probably will continue to consume, an increasing share of a declining volume of Global Net Exports of oil.
*GNE = Net exports from top 33 net oil exporters in 2005, BP + Minor EIA data
Posted by: Jeffrey J. Brown at November 13, 2012 10:27 AM
Who are you, energyecon?
Posted by: Steven Kopits at November 13, 2012 10:51 AM
Professor Hamilton, thank you for injecting some thoughtful analysis on this topic. Every publication I've seen thus far from The NYT to the Economist to Forbes has drank the kool aid without any analysis whatsoever.
Posted by: jtf at November 13, 2012 10:51 AM
I think it is too early to make a real call for US oil production in 2020. In June, pundits called for 2 mbpd of shale production; in August, for 5 mbpd of production. This is clearly a moving target.
Like Stuart, I have my reservations about how thoroughly we can scrape the bottom of the barrel. The IEA numbers are promising--very important for the US economy--but I think the topic is still very much in flux.
In any event, here are our 2020 numbers as of yesterday afternoon:
Net imports Oct. 2012 7.24
Increase in shales (3.00)
Increase in NGLs (1.25)
Conv. Prod. Decline 1.75
Decrease in consumption (1.90)
Net imports 2020 2.84
Consumption 2020 16.67
Import dependence 17.0%
This excludes Alaska, which should provide about 2 mbpd in addition in the 2022-2024 time period, assuming Shell stays on track up there.
Posted by: Steven Kopits at November 13, 2012 11:38 AM
The era of fossil fuels may not be over as quickly as some forecast... especially in light of the pathetic results in Europe experimenting with wind and solar energy as replacements.
Posted by: Bruce Hall at November 13, 2012 02:08 PM
Good article on cost of living, and whether $250k makes you rich:
Posted by: Steven Kopits at November 13, 2012 03:11 PM
Humiliating demonstration of sciences and knowledge from the IEA
No place for doubts in volume and prices forecast, a time horizon of 35 years, an industry known for its accommodative pricing and instruments of pricing, shady deals (Econbrowser posts and comments at the chapter energy)
Nuclear fusion is erased, energy prices are raised,in absence of price cartel the wheat producers are baking their flour to add value to their raw output and the oil industry could be tempted to do the same,when purchasing refineries. The main producers of energy are showing declining customers backlogs, receding profitability (Gazprom latest guidance on profit) The economic forecast are frail but:
The IEA knows that the combustion through time and plasma deuterium-tritium will never see the day on a 35 years time projection.
Combustible Q energy 1 Ton crude oil equivalent
1 Ton crude oil 42 GJ 1 Ton crude oil
1000 m3 gaz 36 GJ 0.86 TCO
1 ton D-T
(tritium- lithium) 378 000 000 GJ 9 000 000 TCO
The fission that could occur in the IEA forecast is in the energy related derivatives pricing coupled with a dramatic slowdown in oil consumption and or an increasing inflation that will acheive the same.
Posted by: Anonymous at November 14, 2012 05:42 AM
A brief illustration of the enormous gap between what the net export data show and the conventional wisdom regarding global oil supplies:
The following sketch shows some normalized ECI and GNE/CNI values for the Six County Case History (Indonesia, UK, Egypt, Vietnam, Argentina, Malaysia) and for GNE, ANE and for Saudi net exports:
The index year (Index Year = 100%) for the Six Country Case History is 1995, and for GNE, ANE and Saudi net exports the index year is 2005.
GNE = Global Net Exports (Top 33 net exporters in 2005, BP + Minor EIA data)
ANE = Available Net Exports (GNE less Chindia's Net Imports)
CNI = Chindia's Net Imports
ECI = Export Capacity Index, ratio of total petroleum liquids production to liquids consumption
GNE/CNI = Ratio of GNE to CNI
CNE = Cumulative Net Exports
RCNE = Remaining CNE, after a given date
NE = Annual net exports per year, for a given year
RCNE/NE = Number of years of estimated net exports at a given net export rate per year
NECI = Normalized ECI, relative to a given index year (1995 or 2005)
N GNE/CNI = Normalized GNE/CNI ratio, relative to a given year (2005)
Gb = Billion barrels of oil (total petroleum liquids)
Six Country Case History:
The ECI value for the Six Countries fell from 1.71 in 1995 to 1.45 in 2001, so the ECI value in 2001 was 85% of the 1995 value. Based on the 1995 to 2001 rate of decline in the ECI ratio, at the end of 2001, the estimated RCNE to NE ratio was 5.1 years. The actual ratio at the end of 2001 turned out to be 2.5 years. Note that because of declining net exports, it took the Six countries six years to hit zero net oil exports (in 2007), versus an estimated 14 years.
The ECI value for GNE fell from 3.75 in 2005 to 3.24 in 2011, so the ECI value in 2011 was 86% of the 2005 value. Based on the 2005 to 2011 rate of decline in the ECI ratio, at the end of 2011, the estimated (GNE) RCNE to NE ratio was 347 Gb/16 Gb per year = 22 years. Estimated number of years to zero GNE = 49 years.
The ECI value for Saudi Arabia fell from 5.60 in 2005 to 3.91 in 2011, so the ECI value in 2011 was 70% of the 2005 value. Based on the 2005 to 2011 rate of decline in the ECI ratio, at the end of 2011, the estimated (Saudi) RCNE to NE ratio was 28 Gb/3.1 Gb per year = 9 years. Estimated number of years to zero Saudi net oil exports = 23 years.
The GNE/CNI value for ANE fell from 8.88 in 2005 to 5.28 in 2011, so the GNE/CNI value in 2011 was 59% of the 2005 value. Based on the rate of decline in the GNE/CNI ratio, at the end of 2011, the estimated (ANE) RCNE to NE ratio was 87 Gb/12.8 Gb per year = 7 years. Estimated number of years to zero ANE = 19 years.
As noted above, projecting the six year initial rate of decline in the Six Country ECI Ratio produced a RCNE estimate that was too optimistic.
Posted by: Jeffrey J. Brown at November 14, 2012 07:03 AM
What I got from that article is that sure, $250k per year is an objectively large sum of money, but only until it gets spent on good housing in great areas with the best schools, vacations, great pre-tax fringe benefits, college savings for the kids, a house keeper (because they're so much busier than the parents getting by on 100k?), expensive extra-cirriculars, etc. Life is hard when you have to choose between a third weekly dance lesson and your daughter's next equestrian meet.
Is that the realization I was supposed to acheive?
Posted by: Rodrigo at November 14, 2012 08:34 AM