India’s Integrated Energy Policy Review report estimates India’s oil demand for 2031-32 to be between 7.5 and 9.7 million barrels per day. India’s import dependence is estimated to shoot up to 90-93 per cent considerably higher than the current level of about 73 per cent. Based on the International Energy Outlook of the US’s Energy Information Administration, world oil demand is forecast to increase from the current level of 85 mmbd to 118 mmbd, an increase of 33 mmbd.
Since most of this huge increases will come from politically unstable countries in the Middle East (see chart-1), forecasting oil prices has been a hopeless task. In addition, energy security is high on the agenda of every country. In recent years, there is a new debate under the rubric of ‘Peak Oil Theory’ concerning the capacity of the world to produce oil to meet the ever increasing demand. One such forecast (by Energy Watch Group) using peak oil theory states that the world oil has already reached its maximum and will decline to less than 39 mmbd by 2030. Such extreme positions should be discarded as mere fear-mongering exercise. On the other hand, the US Geological Survey is estimating more than ample hydrocarbon reserves to meet the world oil demand for the foreseeable period. Based on the USGS results, peak production is unlikely to happen before 2036.
Chart-1 Source: International Energy Outlook 2007 by US Energy Information Administration
Such a diametrically different points of view of the world oil supply poses a great problem to energy planners. So far no government, either in the developed and developing world, or any international aid institutions, have endorsed the views of peak oil theorists or even drawing contingency plans based on its likelihood. But can India take such a risk? Should India start preparing for the end of an oil era even if it does not accept peak Oil arguments?
Peak oil theory
It was in 1956 King Hubbert, a Shell Oil geologist, predicted that the US oil production would peak in 1968.( In fact it took place in 1970, see chart -2). It was a bold decision on his part to make such a prediction. Earlier in the history of the US oil industry development, there have been several such forecasts which have later turned out to be false. But in this case, Hubert turned out to be right as shown below:
Chart -2 Source: BP Statistical Review of World Energy 2007
Hubbert had also made a prediction in 1969 about the world oil production reaching a peak in 2000. This has not turned out to be right. However, some geologists using Hubbert methodology and more recent data for oil reserves and production are predicting that the world oil will reach peak in and around the year 2005. It may be just a coincidence that oil prices have started to increase since 2004. They have already exceeded the mystical level of $100 per barrel. We are now starting to hear price predictions as high as $250 per barrel by some experts.
Those believers in peak oil theory advance different anecdotal arguments using the production and reserves of the some of the leading oil exporters –both from OPEC and non-OPEC. One such exponent is Mathew Simmons of Houston who has published a book titled Twilight in the desert: the coming Saudi oil shock and the world economy. He is not a geologist unlike Hubbert. He is an investment banker. He has studied over 200 technical papers by Society of Petroleum on the production problems faced by key Saudi oilfields. Simmons questions the veracity of Saudi reserves of 264 billion barrels and also that of several other members of OPEC.
As shown in the Chart 3, oil reserves of five Middle East OPEC members, Saudi Arabia, UAE, Iran, Iraq and Kuwait have gone up between 1980 and 2006 from 355 billion barrels to 716 billion barrels. This is an increase of slightly more than 100 per cent. It also happens to be the period when most of the multinational oil companies in OPEC were nationalised and exploration investment in new virgin territories of OPEC was reduced considerably in these countries. It was in 1986 oil prices collapsed below $10 per barrel because of over-production by all OPEC members, excepting Saudi Arabia whose production fell as low as 2 to 3 mmbd. To defend higher oil prices, OPEC agreed to allocate production among its members. One of the criterion used to allocate quota among different member countries of OPEC was proven oil reserves.
Chart – 3 Source: BP Statistical Review of World Energy 2007
To claim a higher quota, OPEC members started to overstate their reserves. This may explain such a phenomenal increase in reserves of five OPEC members since 1980. Unlike oil companies, who cannot overstate their reserves and are audited by independent experts, OPEC members do not allow such independent assessment. Reserves are considered as state secrets. Despite enormous importance to the world, OPEC members do not allow any independent auditing of their oil and gas reserves.
After studying the production performance of all the important oilfields of Saudi Arabia, Simmons has concluded that Saudi Arabia is already at or very near its peak and is likely to go into decline in the very foreseeable future. If this is true then the world has a frightening oil supply scenario soon. He has questioned the future production potential of Saudi Arabia’s Ghawar which is the largest super giant oil field ever found in the world which has been producing oil for over 50 years. Simmons believes that Ghawar has reached its peak.
Just seven giant oil fields of Saudi Arabia including Ghawar account for 90 per cent of its production and all these are mature and old. Only through massive injection of water, production has been maintained in these mature fields. Simmons makes a strong argument to back his main thesis that Saudi Arabia will not be able to produce more than 10 to 12 mmbd at best. This is in contrast to the forecast of many energy economists. It used to be the practice of energy economists to balance world demand versus supply by happily assuming that Saudi Arabia will be able to meet any demand gap which cannot be filled by the rest of the world. Now Simmons has put a spoke into such a simplistic assumption.
Brown and Foucher have adapted a slightly different approach to study the problem posed by peak oil theorists. Instead of looking at when the production will peak, they have analyzed the net oil export capacity of leading oil exporting countries. Currently the five top net oil exporters are Saudi Arabia, Russia, Norway, Iran and the UAE. Using Hubbert’s methodology they have concluded that the net oil export capacity of these five will decline from 23 mmbd in 2005 to zero by 2030. This is a startling conclusion and if true can be devastating. To support their argument, they show what happened to the net export capacities of Indonesia, an OPEC member and the UK, a non-OPEC member. Many of the assumptions they have made to arrive at their startling conclusions are very mechanistic. For example, they have assumed that the annual product demand increase will continue to be constant and high for such a long period.
Indonesia exported 780,000 bpd (total liquids) in 1996. Eight years later, Indonesia was a net oil importer. In a similar fashion, the United Kingdom in 1999 was a major net oil exporter, exporting more than one mmbd. Seven years later, the UK was a net importer. Despite this strong proof, production and consumption profiles of top five oil exporters may be vastly different than that of Indonesia and UK and Hubbert’s prediction may not be applicable in their case.
According to Dr. Campbell, a geologist who has worked for several oil companies, peak for regular oil (cheap and easy to access) has already reached in 2005. Even when we consider heavy oil, deep sea oil and oil from polar and gas, peak will reach by 2011. One can quote some more well known authorities like Sadat-Al-Huseni, former chief executive of Saudi Aramco, Lord Ron Oxburgh, the former Shell Oil chairman, James Schlesinger, former US energy secretary … to support peak oil theory.
Opponents to peak oil theory
Chart – 4 source: IEA’s Future Resources to Reserves
There are formidable opponents of peak oil theory led mostly by USGS and leading multinational oil companies including Exxon Mobil. According to BP’s chief economist Peter Davis, peaking of consumption happens prior to peaking of production. According to IEA, the world has more than enough conventional and non-conventional oil (tar sands of Canada, oil shale of the USA, heavy oil of Venezuela amounting to two trillion barrels) reserves of about 5.5 trillions barrels. Of these only 1.2 billion barrels are proven reserves at best. For the foreseeable future, according to IEA, based on its estimated potential reserves, world needs not have any worry on peaking of oil production.
Chart 5 Source: IEA
The above chart clearly shows that the world has more than enough reserves both conventional and non conventional to meet the likely demand at reasonable price. Even if we adjust for the devalued dollar exchange rate since 2004, crude oil price, which has exceeded $100 per barrel, cannot be justified based on supply/demand. The above chart was prepared at a time when resources required for oil sector like oil professionals, drilling rigs, oil platform, etc had just started to show tight supply against the demand.
There appears to be some similarity between the phenomenon of global warming and peak oil theory as far as their general acceptance. Mathematical model seems to support peak oil theory and there are instances of some countries/regions which have followed the production profile as suggested by this theory. Still there are no sound scientific arguments to claim that the theory will hold good for the whole world as an entity or for every specific country/region. The boundaries of nation states can change as in the case of Soviet Union.
It is true that every oil field will more or less follow the production profile as suggested by the bell curve to a great extent. Thus at one point, production will become uneconomical after reaching a peak. It is difficult to predict with any degree of accuracy when peak will happen and when production becomes uneconomic despite Hubbert being correct on the US. It is this aspect which has prevented the universal acceptance of the peak oil theory. In the case of global warming, science behind the climate changes is very strong. In addition there is also some statistical proof though questioned by few. There are some doubters who feel that it is not possible to consider the interaction of thousands of factors in the nature which influence climate and global temperature. However, world seems to have more or less decided to accept global warming and take some small steps to prevent it. But in the case of peak oil, it is not even on the agenda of any country. The debate is held mostly within the camps of believers of peak oil theory.
Should India plan as though peak oil will happen? It is just a question of time when peak oil will happen. It might have happened already as some experts claim or it may happen by 2011 or 2030. But it will happen within the reasonable long term planning horizon of say 25 to 30 years. Therefore it will be better for India to start planning for a time when oil will be in limited quantity and prices will be far above what one can predict today. This way we in India will support rationalisation of pricing policies and energy subsidies, promote energy efficiency, and various renewable energy sources.
Should focus more on railways than on roads
We will also be forced to reduce the use of private vehicles. On a war footing we will start investing in public transportation like subway systems in all large cities. We may also reduce time of implementing the project from conception to operation. It took more than 15 years for IT capital of India, Bangalore, to start the mass transit project. If we are conscious of the terrible impact of peak oil on India’s economy, we cannot afford such a luxury. An India conscious of peak oil problems might not have given priority to much acclaimed Golden Quadrilateral highway project. Instead it would have allocated most of the available funds to railways.
Investment in railways has to be increased manifold over the current meagre amount to reduce the use of trucking to the minimum. If Britain could construct thousands of kilometers of new railway lines in those primitive times when they did not have the benefit of IT technology and advanced management techniques, Indians should be able to do much more today. Since Independence, additional lines built have not kept pace with the requirement. Management of Indian railway system is totally antiquated. We need a new mission statement for railways which is to contribute to India’s energy security.
In fact most of these should have been done even in the absence of peak oil for better energy security and improved economic productivity. Unfortunately our political system is not taking such difficult and far reaching decisions in time. But the sheer threat of peak oil and the enormous harm it will inflict on every aspect of life should force the political class to change their thinking. Developed world will have a far tougher time to prepare for the aftermath of peak oil since their entire economic system is based on the availability of plentiful and cheap oil. We in India are still not that addicted to oil unlike developed countries. India has the rare opportunity to be a leader in preparing the country for a smooth transition from oil to non-oil era. Do we have the technical and managerial capacity for such an onerous task? Even more important, do we have the political foresight? Does our political system promote such a strategic change in our economy which is different from the rest of the world? India’s development depends upon our responses to these questions.
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