Let’s start with the obvious. Unless something very bad happens this year – a big meteor strikes the earth, a good sized war in the Middle East, or a major sabotage operation– we are likely to consume another 31 billion barrels of oil or, as we call it these days, “all liquids.” All liquids accounts for the odds and ends of liquid fuels such as the grain-based ethanol that is going into our gas tanks rather than our stomachs. No matter how much oil is left under the earth, by this time next year there will likely be yet another 30 billion barrels less to pump out.
Production from existing fields will drop by some 3-4 million barrels per day as old wells dry up. We can’t put our finger on all the places this depletion will occur for, in many places, details of oil is a state secret so as not to embarrass the government. We can be sure, however, that production and exports from some of our favorite sources such as Mexico and Venezuela will be going down so we shall have to find other exporters if we wish to import the 12 million barrels we are going to need this year.
There is some good news on the oil depletion front however. The U.S. Government is forecasting that “average monthly crude oil prices [will] drop throughout most of 2008, reflecting increases in supply from both OPEC and non-OPEC countries and the impact of slowing economic growth on demand.”
So there you have it. Our government believes new production will offset depletion in 2008 especially if we have a consumption-slowing recession, but more on that in a moment.
As to the increase in production, the government might just be right. There are about 100 major new oil production projects currently under way and many of them should start producing from new fields in 2008. Analysis of these projects suggests that anywhere from 3 to 7 million barrels a day of oil from new fields could come into production in 2008. At the low end we are just keeping up with depletion; at the high end world oil production might just take a jump this year.
The trouble with new oil production projects these days is that they have an alarming tendency to slip, not just by weeks but by years. Extracting oil from 10,000 below the sea is just not the same as drilling a couple of thousand feet straight down in an Oklahoma cow pasture. Storms blow up; money runs short as drilling prices skyrocket; key personnel leave for greener pastures; and more frequently these days local governments start agitating for quicker progress and a bigger piece of the pie to boot. Drilling slows while contracts are renegotiated.
There is only so much we can say about production and depletion in the year ahead. Some think it will be a good year with production increasing — and there is certainly evidence it could happen — while some are not so sure. It is interesting to note that open options to purchase oil for $200 a barrel at the end of the year have increased 10-fold recently. At least a few speculators believe oil prices will double in 2008 and are willing to bet money on it.
Oil production of course is controlled by demand as well as the technical capacity to produce and here we have a most unusual situation developing. As our economic numbers turn bad, nearly everyone who is allowed to speak openly is forecasting a recession. Just what this recession will look like and how it will interact with the demand for oil is one of the key questions of the year.
The forecasts are all over the map. If you are in the financial industry, you are talking about “a couple of bad quarters.” The problems will bottom out so that by 2009 the good times will be rolling again. If you are a real pessimist, the apocalypse is coming with widespread failures of financial institutions, massive unemployment, and foreclosures galore. In its most extreme form, the pessimists are positing that the U.S. Government, or at least the U.S. Treasury, goes belly-up in an orgy of hyper-inflation as it tries to make good on all those bank accounts it insures. As usual, the truth is likely to be somewhere between a couple of bad quarters and the end of Western Civilization.
Is there anything useful that can be said about peak oil as we slip into the recession of 2008?
The first thing we might note is that during the year it is likely to be the U.S. and Europe that will be the first to be hit by bad times. The 2.5 billion Chinese and Indians who are growing their economies at about 10 percent a year are likely to keep importing oil at a goodly pace for a while longer. The same goes for most of the oil exporters who will likely be able to sell all the oil they can pump and are unlikely to have liquidity problems.
In America, we are so wrapped up with going places in our cars that gas prices are going to have to double again before we slow down very much. Most of us have no other choice but to drive, drive and drive some more on trips that are deemed essential. So far the evidence points to gasoline consumption continuing at about the current level for awhile longer.
Commercial traffic is another story. If the economy starts to sag, there likely will be some drop in the demand for transportation. Remember, however, we really don’t manufacture much in the U.S. these days and that a lot of our economy is moving stuff around so that we can sell it to each other.
In short, a good bit of world demand for oil is likely to continue moving on its current path. It will take a much bigger economic hit than most are talking about at the minute to slow demand significantly.