Harvard Kennedy School researcher forecasts sharp increase in world oil production capacity and risk of price collapse
27 June 2012
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| World oil production capacity to 2020 (crude oil and NGLs, excluding biofuels). Source: Maugeri 2012. Click to enlarge. |
Oil production capacity is surging in the United States and several other countries at such a fast pace that global oil output capacity could grow by nearly 20% from the current 93 million barrels per day to 110.6 mbpd by 2020, according to a new study by a researcher at the Harvard Kennedy School. Such an increase in capacity could prompt a plunge or even a collapse in oil prices, he suggests.
The findings by Leonardo Maugeri, a former senior executive vice president of the oil company Eni, and now a fellow in the Geopolitics of Energy Project in the Kennedy School’s Belfer Center for Science and International Affairs, are based on an original field-by-field analysis of the world’s major oil formations and exploration projects.
Contrary to some predictions that world oil production has peaked or will soon do so, Maugeri’s projections forecast the biggest jump in any decade since the 1980s.
This increase represents less than 40% of the new oil production under development globally: more than 60% of the new production will likely reach the market after 2020, according to Maugeri.
Maugeri’s analysis finds that the gross additional production from current exploration and development projects in the world could produce an additional 49 million barrels per day by 2020, an increase equivalent to more than half the world’s current 93 million bpd. After adjusting that gross output increase for political and technical risk factors as well as the offsetting depletion rates of current fields, the analysis projects the net increase by 2020 to be about 17.5 bpd.
| “The shale/tight oil boom in the United States is not a temporary bubble, but the most important revolution in the oil sector in decades. It will probably trigger worldwide emulation over the next decades that might bear surprising results—given the fact that most shale/tight oil resources in the world are still unknown and untapped.” —Maugeri 2012 |
The four countries that show the highest potential in terms of effective production capacity growth are—in order—Iraq, the United States, Canada, and Brazil. Much of this increased capacity comes from “unconventional sources” such as US shale/tight oils, Canadian oil sands, Venezuela’s extra-heavy oils, and Brazil’s pre-salt oils. Only four of the current major oil producing countries (more than 1 mbpd of production capacity) face a net reduction of their production capacity by 2020: Norway, the United Kingdom, Mexico, and Iran. In Iran and Mexico, the loss of production is primarily due to political factors. All other producers are capable of increasing or preserving their production capacity, according to Maugeri.
The most dramatic increases involve the exploitation of unconventional oils in the United States, Maugeri says. The extraction technologies are not new, but the combination of technologies used to exploit shale and tight oils has evolved. The technology can also be used to reopen and recover more oil from conventional, established oilfields.
Taking into consideration limitation in transportation infrastructure and refining capacity, and environmental barriers to development, the United States could still increase oil production by 3.5 million barrels per day and conceivably produce a total of 11.6 mbpd of crude oil and natural gas liquids per year by 2020, making it the second largest oil producer in the world, after Saudi Arabia, according to Maugeri.
The Bakken and Three Forks fields in North Dakota and Montana alone could become the equivalent of a Persian Gulf-producing country within the United States. The Bakken formation’s output has grown from a few barrels in 2006 to 530,000 a day in December 2011.
The unprecedented unconventional oil development also comes with environmental protection and regulation challenges. Hydraulic fracturing is increasingly perceived as contributing to water and land contamination, causing natural gas infiltration into fresh water aquifers, and even triggering earthquakes. After more than one million hydraulic fracturing operations in the United States since 1947 (hydraulic fracturing is not a new technology) and comparatively few accidents, shale oil and gas recovery activity can be managed with appropriate best practices and adequate enforcement. Industry needs to develop technological solutions to minimize water use, minimize and report chemical use, and carefully monitor production sites. However, if such a collective effort by industry does not materialize, government may respond with more onerous regulation in the near future that could impact U.S. shale oil production.
While the surge in production in the Western Hemisphere in coming years will in effect leave the region self-sufficient in oil, the global nature of the market makes that all but meaningless except in psychological terms, Maugeri argues. He adds that the industry will need to make major investments to keep oil production environmentally safe to avoid threatening the new bonanza.
A major increase in Iraq’s oil output as it regains stability, which will add new production in the Persian Gulf region—potentially destabilizes OPEC’s ability to manage output and prices, he notes.
The combination of new production in the Western Hemisphere and the still growing production in other parts of the world could lead to a sharp drop in oil prices, Maugeri suggests, which if steep enough could lead oil companies to cut back on investment and ultimately slow down oil supplies. But if oil prices remain above about $70 per barrel, sufficient investment will occur to sustain continued growth in production, possibly leading to a stable phenomenon of oil overproduction after 2015.
Leonardo’s conclusions are not only startling, but his paper provides a transparent explanation for how he reaches them—something lacking in many studies. His findings have major implications for geopolitics, suggesting important shifts in how countries interact and wield influence.
—Meghan L. O’Sullivan, the Jeane Kirkpatrick Professor of the Practice of International Affairs at the Kennedy School and director of the Geopolitics of Energy Project
Resources
Maugeri, Leonardo. "Oil: The Next Revolution." Discussion Paper, Belfer Center for Science and International Affairs, Harvard Kennedy School, June 2012
Im interrested to buy gasoline if the price drop but im even more interrested to buy hydrogen gas because it doesn't pollute and it probably be even cheaper.
Posted by: A D | 27 June 2012 at 06:42 AM
gorr, I thought you were "interested to buy" farts because you said they were free?
LOL
Posted by: DaveD | 27 June 2012 at 06:58 AM
LOL
Posted by: A D | 27 June 2012 at 07:06 AM
If the price of gas does drop, it causes tectonic shifts in world economies.
But we can't ignore the potentially horrendous side effects of these "non-conventional" sources. That is not free to fix, if it can even be done.
That effects the overall cost and you can't wish it away.
Posted by: DaveD | 27 June 2012 at 08:12 AM
Notice that this comes with reverse growth: the accelerated depletion of reserves. This is a race to the bottom of the barrel and if it causes a drop in the price of oil the buying public will be only too glad to cheer the oil companies on as they sprint to the finish.
Posted by: ai_vin | 27 June 2012 at 08:43 AM
I guess that these guys have never heard of the concept "Peak Oil" and the physical factors (not economic factors) that really limit the rate of oil production. Not even the experts at IEA, who are often accused of being too optimistic when it comes to oil extraction and how to overcome the projected “gap” in production when conventional oil production is declining, could have cooked up something like this.
Posted by: Peter_XX | 27 June 2012 at 08:51 AM
Here be implications for electrics and high mileage vehicles.
Posted by: Lucas | 27 June 2012 at 09:01 AM
I am highly skeptical of their analysis, they just ignore the fact that over 100 producing countries 60 are in decline. The tight oil shale are surely the good surprise of these 4 past years but by no means they will increase the world production in the amount they say. This fantasy that US will once again be the number one producer of oil is just plain delusion, the reserve base even including tight oil shale is just not there. And again all official numbers of oil production are Crude oil + LNG, this way of presenting thing totally hide the fact that crude oil production has been plateauing since 2004.
Posted by: Treehugger | 27 June 2012 at 09:50 AM
Those of you skeptical of an oil price collapse should read the recent study by Ricardo. This Harvard Kennedy study addresses only supply whereas Ricardo included demand. Petroleum demand has potential to decline overall with the phenomenal increases in fuel efficiency coming on stream. Natural gas replacing oil as fuel could have a big impact.
The notion that oil is scarce or depleting is absurd, considering the current staggering daily production.
My prediction: oil price collapse is imminent when US oil consumption declines year over year. We're close now.
Posted by: nordic | 27 June 2012 at 10:21 AM
Any collapse in price will be temporary unless it is accompanied by sustained reductions in demand.
Too much of the oil being used to sustain supply required oil to be priced near $100/barrel.
Canadian oil sands, wet shale gas plays, deep ocean drilling, arctic oil extra heavy Saudi crude used to meet demand today all require significant inputs of energy to extract and/or refine to usable product. All these recent plays have come online recently thanks to a huge run-up in oil prices in the last 8 years. A drop in oil prices will reduce the incentive to exploit these plays. Oil companies are only in it for the money, after all.
Other countries who are able to produce oil inexpensively require high oil prices to keep their citizens from revolting (see Arab Spring).
If there is a significant reduction in oil price, it will not be sustainable - very similar to the recent lows in natural gas prices here in the USA.
Posted by: Dave R | 27 June 2012 at 10:31 AM
@Treehugger, I totally agree with you and will add the following:
As long as US oil production is on decline and continues to decline more year by year, it is hard to believe that there is anything behind this analysis. I would be very surprised to see a new oil boom in Texas. There are simply no signs that this would happen. In Europe we have high-tech and well-managed Norwegian oil companies that simply have been forced to admit that – in spite of new discoveries and prospecting high up in the Barents Sea – they already reached their Peak Oil a couple of years ago and now the production is on continuous decline. Why would the laws of physics be different in the USA or any other country for that matter? Oil production can only increase in countries that are not fully exploited yet (certainly this is not the USA) and in this case, we are not talking about any giant oil fields. Before we could rely on some new “magic” technology to increase recovery substantially as they seem to anticipate in the mentioned study, this technology would at least have to be proven once.
Posted by: Peter_XX | 27 June 2012 at 01:01 PM
Peter
The new things that get people excited is this tight oil shale which makes some things that there is a new Saudi under USA, but tight oil shale will do as much to US oil production as Prudo Bay did 35 years ago, a blip in the decline. I am not predicting where the oil price is headed since oil price depend as much on demand as it depends on production, so sure more efficient cars,electric car, natural gaz will have much more effect on oil price on the long run than tight oil shale.
Nordic you should educate yourself about the concept of peak oil, apparently you have no clue how it works.
It is very hard to predict where the oil price is headed since as we are at plateau production the price of oil will be intrinsically highly volatile and we have to live with this until we find something else
Posted by: Treehugger | 27 June 2012 at 03:14 PM
I predict that Obama will claim credit for getting the US off expensive, sustainable energy.
And we can only wish that politicians were “only in it for the money after all”.
By that I mean; make the money stay with us shareholders, not take it from us.
As the world pours taxpayers money into countless efforts to support an unaffordable EV and to produce an affordable one, private industry worldwide has made tight oil loose – using their own money.
Posted by: ToppaTom | 27 June 2012 at 10:21 PM
@Treehugger
Peak Oil, no clue? Well, Norwegian oil production is on decline since a couple of years. I have followed the work of the research group at Uppsala University, who are leading in this field, for a couple of years. Are they wrong? If so, please tell me how Peak Oil works.
Posted by: Peter_XX | 27 June 2012 at 11:11 PM
Sharp increase in world oil production will not be needed because battery will become cheaper and cheaper and more people will be driving PHEV's, because this will give them more energy security. Furthermore, the US EPA and other EPA's world wide will put higher and higher restriction on CO2 emission in an effort to reduce global warming. Smart people will see this and will start investing more and more in renewable energy and energy-efficiency technologies, and less investment in oil, gas, and coal.
Less and less investment will be put into deep sea oil drilling...and who knows, the oil price will stay the same due to lower investment level leading to lower production. Any investor into oil and gas should learn the experience of Chesapeak Gas company undergoing huge losses due to over-investment into NG drilling, with headlines like this: "Chesapeake loses $1.4 billion in value since Friday. Fuel Fix." and beware of investing any further into oil production.
Posted by: Roger Pham | 27 June 2012 at 11:55 PM
I would suggest a halt in the Keystone XL pipeline plan and use the billions earmarked for the Keystone XL on renewable energy installations instead.
Posted by: Roger Pham | 27 June 2012 at 11:59 PM
Oil supply IS keeping up with demand. Asked if he was still worried about peak oil, the director of the UK energy research centre which sounded the alarm just two-and-a-half years ago replied: "Not much".
http://www.bbc.co.uk/news/science-environment-18353962
It has been higher prices in the last decade that, like higher prices in the 1970s, are leading to a resurgence in exploration and have unleashed three technological revolutions. US shale oil is one of them, but it has been preceded by the technological revolutions facilitating the tapping into vast hitherto non-commercial resources in deepwater and shale plays. Now the US is poised once again to become the largest liquid producer in the world and looks almost certain to overtake Russia and Saudi Arabia before the decade is over.
The sources of new supply in the North America include oil sands, deepwater drilling, shale and tight oils, natural gas liquids (NGLs) and biofuel, according to Citi.
http://www.businessinsider.com/peak-oil-where-2012-6
http://feedproxy.google.com/~r/AlsosprachAnalyst/full/~3/hSXD-kgUTpU/peak-oil-where.html#ixzz1z4JdibnM
Posted by: ToppaTom | 28 June 2012 at 12:00 AM
If someone of you wants a second opinion, please have a look at this presentation:
http://dl.dropbox.com/u/9870212/Peeking_at_PO/20120530%20ASPO%202012.pdf
http://www.youtube.com/watch?v=EIJ2AkebgyI
Posted by: Peter_XX | 28 June 2012 at 02:53 AM
Peter
I was insinuating that Nordic has no clue on peak oil concept not you, sorry for the confusion
Posted by: Treehugger | 28 June 2012 at 07:47 AM
@Treehugger
Apologies accepted! Somehow, you are right in a way, since I have not conducted any own studies in the field of Peak Oil. Occasionally, I follow the work by others.
If we look at the publications from Maugeri and the Uppsala group, there are big differences (not only in opinion). The Uppsala group has ~30 peer-reviewed scientific publications, while Maugeri has mostly published his work in newspapers and magazines. It should be obvious to anyone that a peer-reviewed publication is much more demanding when it comes to scientific quality of the work. This is why I rely more on findings from the Uppsala group.
Posted by: Peter_XX | 28 June 2012 at 09:11 AM
There are many factors to support future lower Oil price from lower consumption, such as:
1. Over the horizon long lasting wide spread economic depressions.
2. Future EU/USA multiple Debt Bubbles bursting up.
3. Poorer middle class driving less.
4. Continued higher unemployed driving less.
5. More poorer people using public transports and bikes.
6. Improved ICE vehicles with lower fuel consumption.
7. More and more HEVs, PHEVs and BEVs using less liquid fuel.
8. Lighter car bodies, wheels, tires etc using less fuel.
9. More and more ethanol, butanol and other bio-fuels.
10. Increased use of NG, specially for heavy vehicles.
11. More Coal and NG transformed into liquid fuel.
12. Use of electronic driver assistance to reduce fuel consumption.
However, the word should no count too much on very low oil price in the future. OPEC and high production cost Shale Oil, Tar Sands, Deep Sea operations etc will manage to keep the high high enough to support increased profits.
Posted by: HarveyD | 30 June 2012 at 08:15 AM
Do the heroic, green, oft gov supported sources for EV batteries also "manage to keep the price high enough to support increased profits", or do you selectively apply that concept?
Posted by: ToppaTom | 09 July 2012 at 07:45 PM