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Campbell, C.J., Laherrère, J.H., 1998. The End Of Cheap Oil. Scientific American, March 1998, pp. 78-83

Campbell, C.J., Laherrère, J.H., 1998. The End Of Cheap Oil. Scientific American, March 1998, pp. 78-83

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78Scientific American March 1998
The End of Cheap Oil
I
n 1973 and 1979 a pair of suddenprice increases rudely awakened theindustrial world to its dependence oncheap crude oil. Prices first tripled in re-sponse to an Arab embargo and thennearly doubled again when Iran dethronedits Shah, sending the major economiessputtering into recession. Many analystswarned that these crises proved that theworld would soon run out of oil. Yet theywere wrong.Their dire predictions were emotionaland political reactions; even at the time,oil experts knew that they had no scien-tific basis. Just a few years earlier oil ex-plorers had discovered enormous new oilprovinces on the north slope of Alaska andbelow the North Sea off the coast of Eu-rope. By 1973 the world had consumed,according to many experts’ best esti-mates, only about one eighth of its endow-ment of readily accessible crude oil (so-called conventional oil). The five Middle
The End of Cheap Oil
Global production of conventional oil will begin to declinesooner than most people think, probably within 10 years
by Colin J. Campbell and Jean H. Laherrère
Eastern members of the Organization of Petroleum Exporting Countries (OPEC)were able to hike prices not because oilwas growing scarce but because they hadmanaged to corner 36 percent of the mar-ket. Later, when demand sagged, and theflow of fresh Alaskan and North Sea oilweakened OPEC’s economic strangle-hold, prices collapsed.The next oil crunch will not be so tem-porary. Our analysis of the discovery andproduction of oil fields around the worldsuggests that within the next decade, thesupply of conventional oil will be unableto keep up with demand. This conclusioncontradicts the picture one gets from oilindustry reports, which boasted of 1,020billion barrels of oil (Gbo) in “Proved”reserves at the start of 1998. Dividing thatfigure by the current production rate of about 23.6 Gbo a year might suggest thatcrude oil could remain plentiful and cheapfor 43 more years—probably longer, be-cause official charts show reserves grow-ing.Unfortunately, this appraisal makesthree critical errors. First, it relies on dis-torted estimates of reserves. A secondmistake is to pretend that production willremain constant. Third and most impor-tant, conventional wisdom erroneouslyassumes that the last bucket of oil can bepumped from the ground just as quicklyas the barrels of oil gushing from wellstoday. In fact, the rate at which any well—or any country—can produce oil alwaysrises to a maximum and then, when abouthalf the oil is gone, begins falling gradu-ally back to zero.From an economic perspective, whenthe world runs completely out of oil is thusnot directly relevant: what matters is whenproduction begins to taper off. Beyondthat point, prices will rise unless demanddeclines commensurately.
HISTORY OF OIL PRODUCTION, from the first commercial American well inTitusville, Pa. (
left 
), to derricks bristling above the Los Angeles basin (
below
), beganwith steady growth in the U.S. (
red line
). But domestic production began to declineafter 1970, and restrictions in the flow of Middle Eastern oil in 1973 and 1979 ledto inflation and shortages (
near 
and
center tight 
). More recently, the Persian Gulf War, with its burning oil fields (
 far right 
), reminded the industrial world of itsdependence on Middle Eastern oil production (
gray line
).
 Please note that thelayout of this documentis slightly different than the original.
 
The End of Cheap Oil
Scientific American March 1998 79Using several different techniques to es-timate the current reserves of conventionaloil and the amount still left to be discov-ered, we conclude that the decline will be-gin before 2010.
Digging for the True Numbers
W
e have spent most of our careersexploring for oil, studying reservefigures and estimating the amount of oilleft to discover, first while employed atmajor oil companies and later as indepen-dent consultants. Over the years, we havecome to appreciate that the relevant sta-tistics are far more complicated than theyfirst appear.Consider, for example, three vital num-bers needed to project future oil produc-tion. The first is the tally of how muchoil has been extracted to date, a figureknown as cumulative production. Thesecond is an estimate of reserves, theamount that companies can pump out of known oil fields before having to aban-don them. Finally, one must have an edu-cated guess at the quantity of conventionaloil that remains to be discovered and ex-ploited. Together they add up to ultimaterecovery, the total number of barrels thatwill have been extracted when productionceases many decades from now.The obvious way to gather these num-bers is to look them up in any of severalpublications. That approach works wellenough for cumulative production statis-tics because companies meter the oil as itflows from their wells. The record of pro-duction is not perfect (for example, thetwo billion barrels of Kuwaiti oil waste-fully burned by Iraq in 1991 is usually notincluded in official statistics), but errorsare relatively easy to spot and rectify.Most experts agree that the industry hadremoved just over 800 Gbo from the earthat the end of 1997.Getting good estimates of reserves ismuch harder, however. Almost all thepublicly available statistics are taken fromsurveys conducted by the
Oil and Gas Journal
and
World Oil.
Each year thesetwo trade journals query oil firms and gov-ernments around the world. They thenpublish whatever production and reservenumbers they receive but are not able toverify them.The results, which are often accepteduncritically, contain systematic errors. Forone, many of the reported figures are un-realistic. Estimating reserves is an inex-act science to begin with, so petroleumengineers assign a probability to their as-sessments. For example, if, as geologistsestimate, there is a 90 percent chancethat the Oseberg field in Norwaycontains 700 million barrels of re-coverable oil but only a 10 percentchance that it will yield 2,500 mil-lion more barrels, then the lowerfigure should be cited as the so-called P90 estimate (P90 for “probability90 percent”) and the higher as the P10 re-serves.In practice, companies and countriesare often deliberately vague about the like-lihood of the reserves they report, prefer-ring instead to publicize whichever fig-ure, within a P10 to P90 range, best suitsthem. Exaggerated estimates can, for in-stance, raise the price of an oil company’sstock.The members of OPEC have faced aneven greater temptation to inflate theirreports because the higher their reserves,the more oil they are allowed to export.National companies, which have exclu-sive oil rights in the main OPEC coun-tries, need not (and do not) release detailedstatistics on each field that could be usedto verify the country’s total reserves.There is thus good reason to suspect thatwhen, during the late 1980s, six of the 11OPEC nations increased their reserve fig-ures by colossal amounts, ranging from42 to 197 percent, they did so only to boosttheir export quotas.Previous OPEC estimates, inheritedfrom private companies before govern-ments took them over, hadprobably been conservative,P90 numbers. So someupward revision waswarranted. But nomajor new discov-eries or techno-
 
80Scientific American March 1998
The End of Cheap Oil
logical breakthroughs justified the addi-tion of a staggering 287 Gbo. That in-crease is more than all the oil ever dis-covered in the U.S.—plus 40 percent.Non-OPEC countries, of course, are notabove fudging their numbers either: 59nations stated in 1997 that their reserveswere unchanged from 1996. Because re-serves naturally drop as old fields aredrained and jump when new fields arediscovered, perfectly stable numbers yearafter year are implausible.
Unproved Reserves
A
nother source of systematic errorin the commonly accepted statisticsis that the definition of reserves varieswidely from region to region. In the U.S.,the Securities and Exchange Commissionallows companies to call reserves“proved” only if the oil lies near a pro-ducing well and there is “reasonable cer-tainty” that it can be recovered profitablyat current oil prices, using existing tech-nology. So a proved reserve estimate inthe U.S. is roughly equal to a P90 esti-mate.Regulators in most other countries donot enforce particular oil-reserve defini-tions. For many years, the former Sovietcountries have routinely released wildlyoptimistic figures—essentially P10 re-serves. Yet analysts have often misinter-preted these as estimates of “proved” re-serves.
World Oil
reckoned reserves inthe former Soviet Union amounted to 190Gbo in 1996, whereas the
Oil and Gas Journal
put the number at 57 Gbo. Thislarge discrepancy shows just how elasticthese numbers can be.Using only P90 estimates is not theanswer, because adding what is 90 per-cent likely for each field, as is done in theU.S., does not in fact yield what is 90 per-cent likely for a country or the entireplanet. On the contrary, summing manyP90 reserve estimates always understatesthe amount of proved oil in a region. Theonly correct way to total up reserve num-bers is to add the mean, or average, esti-mates of oil in each field. In practice, themedian estimate, often called “proved andprobable,” or P50 reserves, is morewidely used and is good enough. The P50value is the number of barrels of oil thatare as likely as not to come out of a wellduring its lifetime, assuming prices re-main within a limited range. Errors in P50estimates tend to cancel one another out.We were able to work around many of the problems plaguing estimates of con-ventional reserves by using a large bodyof statistics maintained byPetroconsultants in Geneva. This infor-mation, assembled over 40 years frommyriad sources, covers some 18,000 oilfields worldwide. It, too, contains somedubious reports, but we did our best tocorrect these sporadic errors.According to our calculations, theworld had at the end of 1996 approxi-mately 850 Gbo of conventional oil in P50reserves—substantially less than the1,019 Gbo reported in the
Oil and Gas Journal
and the 1,160 Gbo estimated by
World Oil
. The difference is actuallygreater than it appears because our valuerepresents the amount most likely to comeout of known oil fields, whereas the largernumber is supposedly a cautious estimateof proved reserves.For the purposes of calculating whenoil production will crest, even more criti-cal than the size of the world’s reserves isthe size of ultimate recovery—all thecheap oil there is to be had. In order toestimate that, we need to know whether,and how fast, reserves are moving up ordown. It is here that the official statisticsbecome dangerously misleading.
Diminishing Returns
A
ccording to most accounts, worldoil reserves have marched steadilyupward over the past 20 years. Extend-ing that apparent trend into the future, onecould easily conclude, as the U.S. EnergyInformation Administration has, that oilproduction will continue to rise unhin-dered for decades to come, increasing al-most two thirds by 2020.Such growth is an illusion. About 80percent of the oil produced today flowsfrom fields that were found before 1973,and the great majority of them are declin-ing. In the 1990s oil companies have dis-covered an average of seven Gbo a year;last year they drained more than threetimes as much. Yet official figures indi-cated that proved reserves did not fall by16 Gbo, as one would expect rather theyexpanded by 11 Gbo. One reason is thatseveral dozen governments opted not toreport declines in their reserves, perhapsto enhance their political cachet and theirability to obtain loans. A more importantcause of the expansion lies in revisions:oil companies replaced earlier estimatesof the reserves left in many fields withhigher numbers. For most purposes, suchamendments are harmless, but they seri-ously distort forecasts extrapolated frompublished reports.To judge accurately how much oil ex-plorers will uncover in the future, one hasto backdate every revision to the year inwhich the field was first discovered—not
FLOW OF OIL starts to fall fromany large region when about half the crude is gone. Adding theoutput of fields of various sizes andages (
green curves at right 
) usuallyyields a bell-shaped productioncurve for the region as a whole. M.King Hubbert (
left 
), a geologistwith Shell Oil, exploited this factin 1956 to predict correctly that oilfrom the lower 48 American stateswould peak around 1969.

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