The coming Saudi oil shock and the world economy

John Gray reviews Twilight in the Desert: the coming Saudi oil shock and the world economy by Matthew R Simmons, in The New Statesman:

Matthew R Simmons is convinced that Saudi oil production is near its peak, or indeed may have passed it, a development with awesome implications. Simmons, a veteran oil finance insider who has been an important adviser to the Bush administration, has done a huge amount of research and bases his conclusions on carefully sifted evidence, not large theories. Yet his view is consistent with the theory of M King Hubbert, a Shell geophysicist who argued in 1956 that production rates for oil and other fossil fuels exhibit a bell curve: when roughly half the oil has been extracted, production declines. No one took much notice of Hubbert at the time, but he predicted that oil production in the continental United States would peak and start declining in the late 1960s or early 1970s - as it did. Since then a number of large oilfields have also peaked, including the North Sea in 1999. When oil peaks it does not run out - there is usually a slow decline that can be spun out by new technologies - but the unavoidable result is falling production.

Could we be near a global oil peak? Simmons believes that point may already have passed and warns that the idea that technology can arrest the decline may be a delusion. In his view, Saudi oil production has been boosted by the use of technologies which actually reduce the future supply of recoverable oil. The impli-cation is that Saudi production has peaked, and with it global oil production, at a time when demand is rising inexorably.

More here.

Comments

[Negvex]

Oil demand/prices over the next decade will to a large degree be driven by emerging economy demand at the margin. Here is a thought experiment using Chinese demand to generate some rough back of the envelope forecasts:

- China moves from 3 bbls/person/year to the South Korean per capita consumption level of 17 bbls/person/year over the next 30 years
- No peak in global production

Result: In next 10 years we must find 44 million BOPD - 26 million BOPD to maintain supply and 18 million BOPD to keep up with demand increases.

If you superimpose peak production on top of this demand profile using the following parameters oil prices would increase approximately 250% in real terms over next 10 years - most likely something would give far before that price level:

- Oil demand elasticity of -0.3
- Current production 84 million BOPD
- Current price US$ 80
- Peak production 100 million BOPD
- Post peak decline rate of 3-4%

If you want to try the china oil demand or the peak oil models for yourself using your own assumptions they can be found at Enquirica in the "Research" section: http://www.enquirica.com/index.php?option=com_content&view=article&id=11&Itemid=13