Oil Has Peaked, Y'all

Dallas Morning News
June 12, 2006

The Texas oil industry knows all about peak oil, because we've already gone through it.

In 1972, Texas was king of the oil world. We had increased our oil production by 40 percent during the previous 10 years at relatively low prices. Texas producers were poised for surging production as oil prices exploded and rose tenfold by 1980. The state underwent its biggest drilling boom in history. The number of producing wells jumped 14 percent by 1982. The industry consensus was that oil production would increase dramatically. To general astonishment, it fell instead, despite dramatically higher prices, frantic drilling and improving technology. By 1982, production had dropped to almost exactly what it had been in 1962.

Not everyone was surprised, however. In 1956, M. King Hubbert, an oil geologist and native-born Texan working for Shell Oil, got up before a meeting of the American Petroleum Institute in San Antonio and made a startling statement. He predicted that Texas and lower 48 oil production would peak and start irreversible declines between 1965 and 1971.

He also predicted that world oil production would peak and then decline within 50 years, by 2006.

Dr. Hubbert used complex mathematics to predict recoverable oil reserves, but his resulting model was quite simple: Fields, regions and, ultimately, the world tend to peak and enter irreversible declines when they have produced about half of their recoverable reserves. The underlying cause is that the largest reserves are found first because they're big and easy. The average size of discoveries shrinks over time, so one looks harder for smaller fields, as has happened in Texas.

The lower 48 peaked in 1970. Texas peaked in 1972. Alaskan oil production slowed the U.S. oil decline, but U.S. oil production never equaled its 1970 peak. Today, Prudhoe Bay, the largest American oil field, is now at about one-fifth of its peak production and declining rapidly.

Did we stop finding oil in Texas in 1973? No. However, it is impossible to replace old, very large oil fields, like the East Texas Field, with a collection of the much smaller fields we've been finding in Texas since 1972.

Today, lower 48 oil production is at about half of its 1970 output, and Texas oil production is at about one-fourth of its 1972 rate.

Dr. Kenneth Deffeyes, a former associate of Dr. Hubbert's, recently published a simplified method of predicting the total amount of oil that can be produced from a region. This method is commonly called "Hubbert linearization," or HL. HL uses two known factors – annual production and cumulative production to date – to estimate total recoverable reserves.

How reliable is the HL formula as a predictor? It shows us that the lower 48 peaked when it was 52 percent depleted. Texas' peak did not show up until our oil reserves were 57 percent depleted – but I suspect that can be explained by Texas Railroad Commission regulation, which kept production equal to demand – that is, below the maximum efficient rate.

Another example is the North Sea oil fields, where production has been falling steadily since peaking in 1999 at 52 percent of total recoverable reserves. North Sea oil production is now about one-fourth below its peak. The HL formula would have foreseen this, but the 10 major oil companies working the North Sea fields did not.

Using the best engineers and technology available, they predicted just before what we now know was the peak in 1999 that North Sea production would peak around 2010. They were badly mistaken, but many of these same companies are now saying that world peak oil production is decades away.

The HL model says Saudi Arabia is 58 percent depleted and the world is 48 percent depleted. This is close to where Texas and the lower 48 peaked and started irreversible declines in production. Based on the HL method and historical models, I believe Saudi Arabia and the world are now on the verge of irreversible declines in conventional oil production.

Two legendary Texas billionaires, Boone Pickens and Richard Rainwater – who share a remarkable ability to profitably predict future trends – have looked at exactly the same regional and world data plots that I have looked at, and they have reached exactly the same conclusion: that the world has used about half of its conventional crude oil reserves. Both Mr. Pickens and Mr. Rainwater have tried to warn us about the challenges we will face as a result of declining conventional oil production.

What about unconventional sources of oil? Unconventional reserves are large but can be produced only slowly because of high capital and energy costs per barrel of production. In recent years, new tar sands production has balanced declines in conventional Canadian oil production, with no net increase for exports.

There will be massive efforts with unconventional oil, such as the tar and heavy oil deposits in Venezuela. However, I predict that unconventional sources of oil will only slow – and not reverse – the decline in total world production because of the time and energy needed to expand production of these "oils."

Without question, we have to greatly reduce our energy consumption to account for this new reality. What can we do? I have seen two sensible proposals.

The first is that we fund Social Security and Medicare with a tax on energy consumption, especially at the gas pump, offset by reducing or eliminating highly regressive payroll taxes. Doing this would unleash enormous free-market forces against profligate energy use.

The second proposal is that we electrify our freight railroads and encourage freight to go by rail instead of truck with any of a variety of economic incentives while building electric urban rail systems, such as DART, at a rate much faster than today's pace.

Incidentally, both strategies also will find favor with those concerned about global warming.

Jeffrey J. Brown is an independent petroleum geologist in the Dallas area. His e-mail address is westexas@aol .com. Bart Anderson, with the Energy Bulletin, and consulting engineer Alan Drake contributed to this article. Read more of their work at www .energybulletin.net.