Greg’s Note:
With oil prices still rising to astronomical levels, fingers are
being pointed in every direction for something, or someone, to
blame. There’s no question that global oil production is falling,
but there is also something else going on. David Galland from
Casey Research points to exports and the effect they have on the
global energy market. Why are oil producing countries importing
oil? This is an overlooked aspect of Peak Oil and one that must be
analyzed soon. What about the U.S? We have the ability to produce
more oil yet we’re still exporting the vast majority of what we
use today? What should we do? Send your comments to
greg@whiskeyandgunpowder.com
By David Galland
Stowe, Vermont, U.S.A.
June 10, 2008
You don’t have to have an awful lot of gray hair to remember the
excitement around England’s massive North Sea oil fields. While
discovered in 1969, it wasn’t until well into the 1980s, on the
back of surging oil prices, that the fields came into full
production. Turning up the taps, the United Kingdom (as well as
Norway and Germany, who also have North Sea production) became a
significant exporter of oil.
But then, in 1999, something happened: the UK’s
North Sea production hit peak… that tipping point after which
reservoirs go into decline, setting in motion both reduced
production and progressively higher costs related to extracting
the remaining oil.
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While the experience of North Sea oil production
provides yet another useful example of the validity of the Peak
Oil theory, what concerns us today is a critical but usually
overlooked aspect of the discussion; exports.
At the time that the North Sea peaked in 1999, the
U.K. was exporting 1 million barrels of oil per day. By August
2004, it had become a net importer. What happened to cause the
situation to turn around so quickly?
To understand the importance of exports when
discussing peak oil, ask yourself the question: “What’s more
important: the fact that global oil production is falling… or that
the oil exporting nations are cutting off their exports?”
While the two questions are clearly linked, it is
the nuance of the export question that clearly matters the most.
Especially if you live in a country such as the U.S., which
currently imports about 70 percent of its oil.
Which brings us to the Export Land Model
(or, ELM as I will refer to it from here). The basic thesis
expressed by students of the ELM is that, to fully appreciate the
impact of peak oil, you cannot look only at the production
declines so presciently anticipated by ML Hubbard in 1956. You
also have to look at the rate of local consumption and the
importance of that consumption on the ability of a country to
export their oil.
The ELM graph here looks at both sides of the
equation, and the result as it applies to exports.
As you can see, for illustrative purposes the ELM
assumes that, after a country’s oil production hits peak it will
decline at a rate 5 percent annually at the same time that local
consumption increases by 2.5 percent. The red line then shows the
impact those two metrics will have on the ability of the country
to export its excess production. Using these assumptions, the ELM
shows that exports reach zero in nine years.
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Real world data shows that the metrics used in the
ELM are quite conservative. The chart below plots the hypothetical
ELM against the actual data from the United Kingdom and Indonesia.
While the ELM forecast hypothesizes nine years between peak to the
end of exports, Indonesia’s exports ceased seven years after peak,
and the UK’s exports stopped just six years after peak.
The important take away here is not that
the UK and Indonesia are no longer receiving the oil export income
of the good old days -- that is entirely a localized concern.
Rather it is that the global market is now
deprived of those exports; between UK and Indonesia alone, the
change over the last decade alone amounts to a swing in the wrong
direction of a total of 2 million barrels per day. And those are
just two of a number of important countries that have swung from
exporters to importers in recent years.
China, for example, became a net exporter in 1993,
the result of flattening production against skyrocketing
consumption. Over the last decade alone, China’s oil consumption
has almost doubled, to about 8 million barrels a day, about half
of which is now imported.
So, again, while people tend to focus on
production, they are overlooking the impact on exports forecasted
by the ELM. In the case of China, they went from a net exporter
in 1993 to importing 4 million barrels a day today… with those
imports projected to rise another 50 percent over the next 10
years.
This is what’s creating so much international
competition for the remaining supplies of oil. And why the trend
for higher energy prices is so well entrenched. And if the ELM is
right, things are about to get far worse… far sooner than many
people expect.
Regards,
David Galland
Endnote: The U.S. certainly has a
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