As you pay for the last load of fertilizer or tank of diesel, you can be forgiven for pondering whether the increasing price of cheap oil – arguably the foundation of modern high-yield agriculture – threatens the sustainability of cattle and beef production.
Despite the dire warnings of Peak Oil theorists, the facts say demand relative to development access will have more to do about oil price than supplies.
If you’re unfamiliar with it, Peak Oil, a concept that began in the 1950s, contends that there is a point at which crude oil supplies peak and then begin an irreversible trend toward a finite end. Depending on who is running the abacus, some say that peak has come and gone; others say the peak is on the horizon a few years or a few decades away. Others think the notion is hogwash, period.
Understandably, Peak Oil alarmists gather support when the price of oil and its derivative fuels starts climbing. Most recently, there is civil turmoil in Libya and fears of social unrest spreading to other Middle Eastern countries that has built a fear premium into the market. Before that it was the commodity bubble that lifted crude oil prices as high as $140/barrel (bbl).
Consumption of petroleum and non-petroleum liquid fuels in the U.S. last year was 19.1 million bbls./day, according to the Energy Information Administration (EIA), the statistical and analytical agency for the U.S. Department of Energy. The U.S. produces about 37% of the oil it consumes; Canada is the largest oil exporter to the U.S.
In its most recent “Annual Energy Outlook,” looking ahead to 2035 and utilizing a reference model, EIA projects that world use of liquid and other petroleum will grow from 86.1 million bbls./day in 2007 to 92.1 million bbls./day in 2020, to 103.9 million bbls./day in 2030, and to 110.6 million bbls./day in 2035. Most of the increased usage (84%) is expected to come from nations outside the Organization for Economic Cooperation and Development (OECD). OECD consists of 34 countries, predominantly the world’s most advanced nations but also some emerging countries.
On the supply side, the EIA reference model projects an increase in conventional and non-conventional liquid supplies of 25.8 million bbls./day from 2007 to 2035. They estimate 11.5 million bbls. of that will come from incremental investment increases in production capacity made by members of the Organization of Petroleum Exporting Countries (OPEC).
In the “USDA Agricultural Projections to 2020” report issued in February, “Crude oil prices are assumed to increase over the projection period as global economic activity picks up. From 2011 through 2020, crude oil prices are expected to rise somewhat faster than the general inflation rate. By the end of the projection period, the nominal refiner acquisition cost for crude oil imports is projected to be around $110/bbls.”
According to the American Petroleum Association (API), the global demand for oil peaked in 2007 at more than 86 million bbls./day before rebounding last year. In between, the Great Recession lowered demand by about 2 million bbls./day.
“There is more than an adequate inventory of physical resources available to increase supply to meet anticipated levels of demand through 2030,” said Peter Jackson in 2009, senior director of IHS Cambridge Energy Research Associates (CERA). “It would be easy to interpret the market and oil-price trends from 2003 through 2009 in isolation to support the belief that a peak in global supply has passed or is imminent. But this only illustrates that the market continues to act as the shock absorber of major volatility.”
IHS CERA is a leading advisor to energy companies, consumers, financial institutions, technology providers and governments. Jackson made the statement based on that organization’s analysis (“The Future of Global Oil Supply: Understanding the Building Blocks”) of more than 10,000 projects around the globe.
In that study, 60% of the more than 1,000 fields examined in detail had production levels that were either steady or climbing. Taking into account the production of those fields, the global aggregate decline rate of all fields currently in production was estimated at 4.5%.
The report projects global oil productive capacity to grow to as much as 115 million bbls./day through 2030, a 25% increase from the level at that time of 92 million bbls./day. After 2030, the study suggests supply could struggle to meet demand but would take the form of a decades-long “undulating plateau” rather than a sharp fall.
Keep in mind, the study examined fields in current production with current technology.
According to API, refining capacity in the U.S. has increased 11% since 1985. According to that organization’s report, “Energizing America,” a number of refineries are expanding and upgrading equipment to handle increased processing of heavier crude oils, including oil derived from Canadian oil sands. The Canadian oil sands are estimated to represent the second-largest oil reserve in the world, next to Saudi Arabia.
Based on research conducted by IHS CERA last year, oil sands imports to the U.S. could ultimately increase to a range of 20%-36% of U.S. oil and refined product imports by 2030, compared to the 2009 level of 8%.
According to IHS CERA, production from oil sands more than doubled from 600,000 bbls./day in 2000 to 1.35 million bbls./day in 2009. They say the potential is three or four times that – 3.1-5.7 million bbls./day by 2030.
There are plenty of other examples of conservative government supply estimates that have proven untrue. For instance, according to API:
• “Alaska’s North Slope oilfield has produced more than 16 billion bbls. of oil and natural gas liquids, and is still producing. Government agencies forecast the region would produce no more than 10 billion bls. total.”
• “In the Bakken Formation of North Dakota and Montana, the U.S. Geological Survey now says 3-4 billion bbls. of undiscovered oil are available – 25 times more than the original estimate made in 1995.”
• “In 1987, the Department of Interior Mineral Management Service (MMS) of the U.S. Depart-ment of the Interior estimated that there were 9 billion bbls. of oil in the Gulf of Mexico. By 2006, after major advances in seismic technology and deepwater drilling techniques, the MMS resource estimate for that area had ballooned to 45 billion bbls.”
The point is that even as global demand increases; innovation and technology are paving the way to increased production of known supplies, as well as discovery of new sources.
All of that is before considering petroleum savers and extenders like alternative fuels, increased fuel efficiency, conservation programs and the like.
Incidentally, while production of alternative fuels is growing, they’re not expected to do much to displace petroleum any time soon. According to API’s report, “…oil accounts for 37% of our energy use with the lion’s share of it fueling 94% of our transportation energy needs. Although ethanol and other biofuels are expected to grow rapidly in the future and steadily displace some oil use, EIA forecasts oil will continue to account for the largest share of our energy needs filling 33% of total energy demand and 85% of our transportation needs in 2035.”
Access is the key
Instead of supply, the more pressing wonderments revolve around demand and how much current and future supplies are allowed to develop.
“Supply evolution through 2030 is not a question of resource availability,” Jackson says. “The crucial issue lies not belowground. It is the aboveground factors that will dictate the ultimate shape of the supply curve.”
Jackson explained key aboveground factors include such things as global economic growth, the capability of the upstream oil industry, costs, government policies on access to reserves and taxation, the evolution of renewable alternative energy sources, and the effect of climate-change issues on policy concerning the use of fossil fuels.
According to the previously mentioned API report, the National Petroleum Council (2008) examined a broad range of global energy supply, demand and technology projections through 2030 and concluded that, ‘the world is not running out of energy resources, but there are accumulating risks to continuing expansion of oil and natural gas production from the conventional sources relied upon historically.’”
The risks cited include a resurgence of nationalism in Latin America, energy subsidies in Asia, extreme global weather events and restricted access to resources in the U.S.
“So much will happen between now and 2030 to affect demand – from changes in the automobile engine and the electric battery to changes in demographics and values,” Jackson says. “Peak demand may ultimately prove to be the main driver of long-term supply.”