Helping America Navigate a New Energy Reality

Restrictions on World Oil Production

By on 28 Mar 2011 in commentary

(Note: Commentaries do not necessarily represent the ASPO-USA position.)

Restrictions on world oil production can be divided into four categories:

1. Geology

2. Legitimate National Interests

3. Mismanagement

4. Political Upheaval

Consider each in reverse order:

Political upheaval is currently rampant across the Middle East, resulting in a major spike in world oil prices. No one knows how far the impacts will go or how long it will take to reach some kind of stability and what that stability will mean to oil production in the Middle Eastern countries that produce oil. We are thus relegated to best guesses, which span weeks, months, or years before there are clear resolutions. One pre-Middle East chaos country limited by political upheaval is Iraq, which is believed to have the oil reserves to produce at a much higher level, but Iraqi government chaos has severely limited oil production expansion. In another long-standing case, Nigeria has been plagued by internal political strife, which has negatively impacted its oil production.

Mismanagement of oil production within a country can be due to a variety of factors, all of which mean lower oil production than would otherwise be the case. Venezuela is the poster child of national mismanagement. The country has huge resources of heavy oil that could be produced at much higher rates. Underproduction is due to the government syphoning off so much cash flow that oil production operations are starved for needed funds. In addition, Venezuela has made it extremely difficult, if not impossible for foreign oil companies to operate in the country. Another example of mismanagement is Mexico, where government confiscation of oil revenues, substandard technology, and restrictions on foreign investment has led to significant Mexican oil production decline.

Legitimate national interests include decisions by governments to husband their oil reserves for the long-term benefit of their people. This occurs in various ways, some of them subtle. Not so subtle is the Saudi King’s decree that any new oil fields discovered in the near future will not be developed in order that new discoveries can benefit Saudis in future years.

Then there is geology, which is the ultimate restriction. Oil is a finite resource. We will never produce more oil than nature provided over millions of years. All that’s there is called the oil resource, but we can only produce what is called the “reserves,” which is a fraction of the resource. Why? Because the geology associated with each oil deposit sets a practical limit on ultimate production. In a few cases, reserves can total up to half of a local resource. In others, reserves can amount to no more than a few percent of the resource. Typically, reserves are around 30% of the resource. If you think we should be able to do better than 30% on average, take some time to look at some oil reservoirs rock cores. The complexity is often mind boggling.

What’s this all boil down to? Based on geology, many analysts have forecast the onset of the decline of world oil production in the next 2-5 years. Legitimate national interests, mismanagement, and political upheaval can only hasten that onset. To explain these and other energy issues we wrote the book entitled “The Impending World Energy Mess.” Oil production is a very complicated activity. What happens in oil will impact all of us, so it’s worth some study.

Robert L. Hirsch is a former senior energy program adviser for Science Applications International Corporation and is a Senior Energy Advisor at MISI and a consultant in energy, technology, and management. Hirsch has served on numerous advisory committees related to energy development, and he is the principal author of the report Peaking of World Oil Production: Impacts, Mitigation, and Risk Management, which was written for the United States Department of Energy.

3 Comments

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  1. cameron conacher says:

    The sole arbiter of constraint is world GNP due to the need for much funds (100$+/barrel oil) to produce, refine, use sour oil/coal/ect fuel sources. As the world GNP dies due to quakes (Japan) and lack of oil revenue going back to consumers (USA becomes Saudi to quell domestic issues); the ability to pay for long term infrastructure investments to obtain/use sour oil ends and the depletion rate of high grade oil (8-10%/year if include swing producer of deep oil) takes over. No converstion to alternative sources, if available, is possible under that scenario. Only a move from consumption at any price to local high value useage may work; excepting food production/distribution.

  2. Bill Simpson near Slidell LA. says:

    Don’t forget that whenever the peak becomes obvious, any exporter will be able to drive up the price, just by announcing that they are reducing their oil exports. Word will spread fast that Country X is reducing their oil exports. Unlike today, all of our friendly oil suppliers will be pumping flat out after the peak. There won’t be any surplus production left, so the price must rise if any oil is purposely withheld. When the rest of the exporters see what happens after the first announcement, they would be fools not to follow. The oil price could explode overnight. That is my nightmare scenario, after about 2015.

  3. John R. Sauers says:

    How is a known Oil reserve computed?? Fixed number of wells allowed to be pumped and the quantity these permitted wells can pump per day equals the KNOWN reserve. Why do we allow this to continue? The data calculated is not the true reserve capacity.

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