WORLD OIL FORECAST #6
Rich Duncan 8-30-2001

ABSTRACT:
World Oil Forecast #6 concludes the following: (1) 23 out of 44 nations [representing 99% of world oil production in 2000] have passed their production peaks, (2) 3 out of the 7 regions of the world have passed their peaks, (3) 4 out of 11 OPEC nations have passed their peaks, (4) Non-OPEC production will peak in 2003, (5) OPEC production in 2017, and (6) world oil production in 2005.

INTRODUCTION:
World Oil Forecast #6 has just been completed for 44 nations comprising more than 99% of the world oil production in 2000. I used 44 separate models and the System Dynamics approach utilizing many different sources of numeric information (i.e., data) including (1) oil discoveries [USGS, World Oil, etc.], (2) reserve estimates [USGS, O&GJ, BP, etc.], and (3) production data [BP, O&GJ, World Oil, etc.]. Notable advantages of System Dynamics include (1) its large selection of simulation tools, (2) great flexibility, (3) ease of modification and iteration, and (4) high precision.

In this Forecast #6 I consulted with petroleum geologists in North America, Europe, and the Middle East for their first-hand experience and their heuristic (i.e., qualitative) knowledge. I call this method "Computer Augmented Intelligence" (CAI, for short) -- it includes techniques I've used (and invented) during the past 30 years while doing many different energy projects. Note: The CAI approach has nothing whatsoever to do with e.g., parabolic, Gaussian, normal, or bell-shaped curves. Nor with Fourier or Laplace transforms. Nor with .... etc. etc. It is an entirely new and, as far as I know, unique approach to oil (energy) forecasting.

A PEEK AT THE PEAKS
Some important results of Forecast #6 are summarized below for 44 nations, 7 regions, OPEC, Non-OPEC, and the world. Two indicators are of special interest: [1] the peak year of production for each nation, region, OPEC, Non-OPEC, and the world, and [2] "EUR Used": the ratio of Cumulative Oil Production (Q at end-2000) and Expected Ultimate Recovery (EUR) expressed in percent [%]. "Peak Year" means the historic or forecasted year of peak oil production. "EUR Used" means the ratio of Q (at end-2000) and the EUR expressed in percent [%]. Briefly put: When "EUR Used" equals 100%, then oil production stops -- forever.

REGION I: NORTH AMERICA

REGION II: SOUTH AND CENTRAL AMERICA

REGION III: EUROPE

REGION IV: FORMER SOVIET UNION (FSU)

REGION V: MIDDLE EAST

REGION VI: AFRICA

REGION VII: ASIA PACIFIC

WORLD

Rich Duncan, 8-30-2001

EIA's WORTHLESS "PRICE" MODELS
Jay Hanson -- www.dieoff.org
August 26, 2001

The US government has a long history of failed energy forecasting, e.g., the Hubbert/Zapp debate, PROJECT INDEPENDENCE, etc. Today, even though many geologists and engineers are predicting a "peak" in global oil production (est. 2006 [1]), the Energy Information Agency, EIA, of the US Department of Energy sees no supply problems for at least 20 years. [2] Why doesn't the EIA foresee the looming peak in global oil production?

An even better question is, "Why has no economist EVER foreseen a peak in global energy production?" Because a global energy production peak due to physical constraints is impossible in an economic model! Why impossible?

Two fundamental problems make economic models literally worthless for global energy peak forecasting: the economic method, and the explanatory variables.

THE ECONOMIC METHOD
The economic method is after-the-fact price correlation and reasoning [3] which, in principle, is unable to forecast the global peak. EIA's current energy forecast comes from an "econometric" model developed something like this: Economists first abstract everything to "prices". Economists then observe relationships between (or "correlate") economic variables in the economy. For example, if income (in $) increases, economists will observe that energy consumption (in $) increases too. After thinking about it for a while post hoc, ergo propter hoc, or after-the-fact reasoning, economists conclude that consumption is a function of income: C= f(Y) .

Econometricians then calculate the mathematical, historical relationship between income and energy consumption, and then use that relationship to forecast how changes in income will effect consumption in the future. Obviously, such a computer model is unable to foresee an event that has never occurred before (such as a global, permanent shortage of energy). Nor can a model based solely on economic trends forecast physical trends. Economists have no way of modeling energy itself; they can only model "energy prices".

In other words, it is fundamentally impossible for any after-the-fact correlation to foresee an event that has never occurred before, e.g., a global energy production peak due to physical constraints.

PRICE VARIABLES
The second problem arises because the "explanatory variables" in economic energy models are "prices".
"This [Project Independence] demand modeling system was really one of the first attempts to model the demand for all energy products simultaneously, using prices as explanatory variables." [4] In an economic model, the reasons (explanatory variables) that production declines in one area are either because demand declines or because another area can produce it "cheaper". Moreover, since there will always be "cheaper" some place, the economist believes a global energy production peak due to physical constraints is literally impossible until the last drop is sucked from the ground. [5] In other words, economic models make no explicit provisions for universal physical constraints like gravity, friction, thermodynamics, and so on. In short, economic models like the EIA's are so unrealistic that they can't even pass the "straight face test"! Yet, governments around the world are betting their citizens' lives on them!

SO-CALLED "FREE MARKETS"
What about the economists' universal political agenda: so-called "free markets"? Before the peak, there is a correlation of sorts between prices and energy production. Simply stated, prices rise, then energy production rises, and then prices fall. But after the impending peak, so-called "free markets" will rapidly -- and utterly -- destroy what's left of the global economy for two reasons:

#1. Energy bidders will "bid up" energy prices in a way that has no relationship to the actual energy shortfall. It's like an auction where two people each want the same unique painting. The price paid depends upon what the other person did. Last year, spot energy prices rose 10,000% over what they were a year earlier. [6] Again, economists have no way of forecasting prices in this type of bidding war. At this point, all economic models become completely worthless.

#2. Higher prices will not produce more energy because energy production will be constrained by the limiting physical parameters. Economists are totally unaware of these limiting physical factors. Instead, higher prices will reduce oil production even further as freezing poor people riot because the rich will still be playing their games in the refrigerated desert.

WHAT IF?
Although many of us expect the North American natural gas crisis (est. year 2003 [7]) to take everything else with it, what if the gas crisis is somehow solved, and then global oil production "peaks" around the year 2006?
According to Roger Blanchard, production in a major, mature Norwegian oil field typically declines at 15-25% per year. [8] So there is good reason to expect that someday global oil production will also be declining at 15-25% per year. After all, it's just a matter of time...
Two years ago, a 6% cut in production caused a tripling of oil prices. So we may fairly assume a scenario something like the following. Suppose (very conservatively) that by 2010 global production is "only" falling at, say, 6% per year -- every year?
*-First year: global oil production drops 6% due to the physical limitations of the resource (pore space in the rock, energy requirements to mine, etc.), and this causes global oil prices to triple (say, to $100 a bbl).
*-Second year: the global economy slows 2-3% (layoffs, bankruptcies), so would oil prices drop back to only double what they were the first year ($50) -- but at the same time, oil production drops 6% again, so oil prices triple again ($150).
*-Third year: the global economy slows another 2-3% (even more layoffs, bankruptcies), oil prices drop back to only double what they were the second year ($75) -- but at the same time, oil production drops 6% again, oil prices triple again ($225).
*-Fourth year: the global economy slows another 2-3% (even more layoffs, bankruptcies), oil prices drop back to only double what they were the third year ($110) -- but at the same time, oil production drops 6% again, oil prices triple again ($330).
The above scenario repeats itself, year-after-year, until what? Until country after country -- including oil producers like Columbia, Nigeria, Sudan, the Caspian region, etc. -- either disintegrates into anarchy or becomes a police state!

WHAT CAN BE DONE?
Can anything be done to mitigate the worst? Here are three, quick no-brainers:

#1. Immediately re-regulate ALL aspects of energy production and distribution. Simultaneously, government must prepare nationwide rationing and safety net plans so that the most needy (e.g., hospitals, people who live in cold climates) can get enough energy to survive as best as they can.
#2. Stop providing federal funding for roads. We aren't going to need them anymore.
#3. Stop licensing fossil fuel power plants. We aren't going to need them either.

Jay -- www.dieoff.org
Kailua-Kona, Hawaii

References:

[1] THE PEAK OF WORLD OIL PRODUCTION AND THE ROAD TO THE OLDUVAI GORGE, by Richard C. Duncan, Ph.D.; Pardee Keynote Symposia, Geological Society of America, Summit 2000, Reno, Nevada, November 13, 2000;
http://dieoff.com/page224.htm

Presentation to British House of Commons All-Party Committee on July 7th 1999: THE IMMINENT PEAK OF WORLD OIL PRODUCTION, by C.J. Campbell at
http://www.hubbertpeak.com/campbell/commons.htm
See Campbell's estimates by country:
http://dieoff.com/campbell.htm

[2] eia.doe.gov/oiaf/aeo/index.html

[3] THE ECONOMIC METHOD: After-the-fact Correlation and Reasoning by analogy

Did I ever tell you about my cat? I have a cat that can predict the stock market! I got this cat about ten years ago from an old lady who said that it could predict the stock market. She said that if the cat "meowed", the stock market would go up on that day. I didn't believe it at first, but sure-enough it was true. Over the last nine years the cat was right more than it was wrong -- I made millions.

About a year ago, a car killed my cat. I really loved that cat so I had it stuffed and put on the wall. You know what? The cat doesn't meow anymore, but the stock market doesn't go up anymore either. So I am beginning to think that the cat actually CAUSED the stock market to go up or down. Numbers don't lie do they? Now I am not sure whether the meow was cause or effect... I am sure I can find out which by studying economics. (Although some say there are virtually an infinite number of explanations for the same observation, and only the "scientific method" can separate fact from fiction.) What do you think? Was the meow cause or effect? Or both? Or neither? Economists run into this problem all the time...

[4] p. 69, ENERGY PLANNING AND POLICY: The Political Economy of Project
Independence, Thomas H. Tietenberg; Lexington, 1976;
http://www.amazon.com/exec/obidos/ASIN/0669000485

[5] In the last 30 years, literally hundreds of qualified authors have written critiques of Neoclassical theory. See, for example, Gene Tyner, Sr., Ph.D., Dir. Oklahoma Institute for a Viable Future at
http://home.mmcable.com/oivf/EAcritique.htm
(Dr. Tyner was kind enough to review a draft of my paper.)

[6] UPDATE 1-Calif. pleads for emergency power imports
December 13, 2000 4:59pm Source: By Leonard Anderson
SAN FRANCISCO, (Reuters) - California power officials warned on Wednesday that growing concerns over whether California can pay for its electricity imports have cut those imports to the point where blackouts, perhaps as early as Wednesday afternoon, might be unavoidable.
Officials at the California Independent System Operator (ISO), which manages about 75 percent of the state electricity system, told a news teleconference they were prepared to declare a Stage Three power emergency -- the highest level -- later Wednesday, opening the possibility of rolling blackouts throughout the state to avoid overloading the grid. California, in its 10th consecutive day of power emergencies, is struggling to keep the lights on as the needs of a growing population and strong economy threaten to overwhelm supplies. No major power plants have been built in California for the past 10 years. Kellan Fluckinger, the ISO's chief operating officer, called California's latest power crisis an ``extremely dynamic situation'' that was fluctuating hourly. He said there was better than a 50 percent likelihood that blackouts could begin as early as 1:30 p.m. PST. Several key power traders in the Western U.S. and Canada have said they can no longer accept the high risks linked to selling power to the real-time California market, citing recent spot power prices briefly topping $3,000 per megawatt hour, nearly 100 times what they were fetching a year ago.

[7] Alberta natural gas to "peak" in 2003! [snip] Just how tenuous this math has become was driven home last month by the staid provincial regulator, the Alberta Energy and Utility Board (EUB). Its supply outlook for 2001 to 2010 predicted that conventional natural gas production in Alberta, Canada's key producer, would peak by 2003 at 5.3 tcf and therefore decline by 2% a year for the next five years. Over the next decade, Alberta will have exported or burned up about three-quarters of its potential gas reserves. It's a case of going, going, gone.
The rest is at
http://www.canadianbusiness.com/magazine_items/2001/aug20_01_thenext.shtml
Mexican Natural Gas Attracts U.S. Firms
[snip] U.S. natural gas producers have been operating at full capacity since 1996, Prize Energy Corp. Chief Executive Philip Smith said at the summit, which has drawn about 800 people. Despite a 50 percent rise in production spending in the United States during that time, production volume will increase only 1 percent to 2 percent this year, Smith said. Meanwhile, U.S. demand for natural gas will rise 50 percent in the next 10 to 15 years for use by industry, for electricity generation and for residential use."The rest is at
cnniw.yellowbrix.com/pages/cnniw/Story.nsp?story_id=23091236

[8] ANALYSIS OF THE IEO2001 NON-OPEC SUPPLY PROJECTIONS, by Roger D. Blanchard, Northern Kentucky University, 4/9/2001
http://dieoff.com/page231.pdf

Jay -- www.dieoff.org
Kailua-Kona, Hawaii

Jay Hanson

Whatta Hero!

Mizaru, kikazaru, iwazaru.